Sri Lanka central bank keeps rates steady as Mideast war raises risks
A woman walks past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka February 7, 2017. REUTERS/Dinuka Liyanawatte
COLOMBO, March 25 : Sri Lanka's central bank kept its benchmark policy rate on hold on Wednesday, wary that rising energy costs linked to the Middle East war could derail recent gains in taming inflation.
The Central Bank of Sri Lanka (CBSL) maintained the overnight policy rate at 7.75 per cent, as forecast by a Reuters poll, citing low inflation and a restrained approach on the fallout of the U.S.-Israeli war on Iran.
"We have good space to absorb shocks both in terms of inflation and foreign reserve buffers, which are now at $7.3 billion," CBSL Governor P. Nandalal Weerasinghe said at a press conference, adding he saw no risks to financial stability.
"If uncertainty continues, we will make changes to inflation projections," he said. "I'm sure authorities will take steps to protect the economy against shocks, and that is all we can do as this situation is beyond our control."
Inflation is now expected to reach the central bank's target of 5 per cent in the second quarter of 2026, CBSL said in a statement, after Sri Lanka raised fuel prices by about 35 per cent this month.
"However, spillovers from the ongoing conflict could weigh on domestic economic activity in the period ahead should the conflict be prolonged," the bank warned.
CBSL has held rates steady since last May as the nation recovers from a 2022 financial crisis driven by a severe dollar shortage.
Supported by a $2.9 billion program with the International Monetary Fund (IMF), Sri Lanka posted a strong economic recovery last year, growing by 5 per cent and now targeting growth between 4 per cent and 5 per cent in 2026.
"What stands out is that they see space for inflation to rise because of energy prices but still stay contained," said Anjali Hewapathage, deputy head of macroeconomic research at Colombo-based Frontier Research, referring to CBSL.
"From now to June, underlying economic momentum has the space to keep pace despite the disruption because domestic liquidity and credit has been quite substantial as well."
An IMF team will arrive in Colombo on Friday for the combined fifth and sixth reviews of the bailout.
