Sri Lanka central bank leaves rates pat to ensure sustained recovery

MUMBAI: Sri Lanka's central bank left its key policy rates steady on Thursday and committed to keeping monetary policy accommodative to support a sustained economic recovery as the inflation environment remains benign.

The Central Bank of Sri Lanka (CBSL) kept the standing deposit facility rate and the standing lending facility rate at 4.50% and 5.50%, respectively. The statutory reserve ratio was also left unchanged at 2%.

"The Central Bank reiterates the necessity to maintain the low interest rate structure, amidst the significantly high excess liquidity in the domestic money market, thereby facilitating the take-off of domestic investment," the monetary board said in a statement.

CBSL said most market interest rates have declined to historic lows on the back of measures taken by the central bank and the government, but that there was some upward pressure seen on bond yields in recent times in contrast to expectations.

"Inflation is expected to remain subdued in the near term and any upward pressures over the medium term could be mitigated, to a large extent, by the envisaged supply side improvements," the monetary board said in the statement.

Despite the low inflation currently, price pressures could emerge over the medium-term due to improvement in demand conditions and a recovery in global commodity prices, it said, but it expected those to be neutralised by supply improvements.

EXTERNAL SECTOR CHALLENGES

The external sector remains resilient despite some near-term challenges, CBSL said.

Dwindling foreign reserves, a tumbling currency and rising debt levels have dogged Sri Lanka over the last year, leading to increasing fears of a default.

CBSL said the country's trade deficit is expected to continue to narrow as spending on imports falls. It said workers' remittances should continue to see healthy growth in 2021.

"The Central Bank and the Government continue to engage with investment and lending partners to secure foreign financing and remain committed to honouring foreign currency debt service obligations on time," CBSL reiterated.

China approved a 10 billion yuan ($1.54 billion) currency swap with Sri Lanka, a government spokesman in Colombo said last month, providing some respite from concerns about public finances.