Sri Lanka’s central bank held rates steady on Thursday and the governor sounded a note of cautious optimism about the damaged economy, saying foreign exchange reserves were on the mend and runaway inflation could peak as early as September.
Still, the economy is likely to contract 8% this year and growth is not likely until the second half of 2023, Nandalal Weerasinghe said at a news conference.
“The monetary board looked at lower global prices, a slower pace of inflation and moderating growth as key reasons for keeping rates unchanged,” the central bank chief said.
“We are also looking forward to fresh policies in the interim budget and confidence that will come from an IMF programme to assist with stability over the next few months.”
The country is due to restart bailout talks with the International Monetary Fund (IMF) in August in the hope of securing $3 billion in funding.
The central bank kept the Standing Lending Facility ) rate at 15.50% while the Standing Deposit Facility Rate remained at 14.50% as predicted.
The central bank has raised rates by a record 950 basis points so far this year to battle inflation in Sri Lanka, which has been hit by its worst economic crisis since independence in 1948.
A foreign exchange shortage had left the government struggling to pay for essential imports but Weerasinghe said the country now had adequate reserves for importing food, fuel and medicine.
Inflation hit 60.8% year-on-year in July and food costs expanded by a searing 90.9%, according to latest government data, although the rate of the increase is falling.
Weerasinghe said inflation was projected to peak in September “at 60%-65% and then start to trend down.”
A central bank statement said the measures taken by it and the government so far would help contain aggregate demand pressures while an anticipated decline in global commodity prices would pass through to domestic prices.
Colombo’s main stock index ended flat on Thursday after earlier rising as much as 1.2% during the session. The index is up 15.3% in August on optimism that the worst of the crisis is over, but is still down 27% on the year.
