Sri Lanka central bank likely to raise rates for 4th time this year

May 17, 2022: The Central Bank of Sri Lanka (CBSL) is likely to raise rates for a fourth consecutive time this year on Thursday, analysts said, as the country attempts to contain surging inflation amid its worst financial crisis in decades.

Sri Lanka has almost no useable reserves left, its newly appointed Prime Minister Ranil Wickremesinghe said on Monday, estimating that about $75 million is needed urgently for imports of essential items, including cooking gas and medicine.

The median estimate in a Reuters poll of 12 analysts predicted that the CBSL will raise its standing deposit facility rate or the SDFR to 14.25% while the standing lending facility rate will go up to 15.25%.

The two rates are expected to rise to 15% and 16% by July.

"Overall, we expect headline inflation to rise above 30% YoY in the next 3-6 months, with food and transport sub-categories being drivers," said Thilina Panduwawala head of economic research Frontier Research.

The CBSL's official inflation target for the country is set at 4-6%.

Long lines have become standard at fuel stations as thousands of vehicle owners wait for scant deliveries of petrol and diesel.

In early April, Central Bank Governor Dr. P. Nandalal Weerasinghe in his new role hiked rates by a historic 700 basis points.

Seven out of a dozen economists polled by Reuters predicted a further rate increase of 50 to 200 basis points on Thursday as inflation hit 29.8% in April, with food prices skyrocketing by 46.6% year-on-year.

Wickremesinghe, who was appointed last Thursday, has already said he will be forced to boost energy prices and will bring in a new budget that will increase tax increases as the government attempts to tackle a 13% budget deficit for 2022.

In early April, the South Asian island of 22 million people suspended payment on some of its foreign debt and started talks on a bailout programme with the International Monetary Fund (IMF) after months of delay.

India recently provided about $1.9 billion in swaps and credit lines and the country is in talks for more bridge financing from the World Bank and Asian Development Bank.

Investors will closely monitor any comments from the governor on how CBSL plans to rein in price pressures and help stabilise the economy amid the ongoing turmoil.

Reuters