By Uditha Jayasinghe and Swati Bhat
COLOMBO (Reuters) – Sri Lanka’s central bank threatened administrative intervention on Thursday to rein in high market interest rates it said were at odds with the inflation outlook.
Any such action, interpreted by economists as meaning it could depress market interest rates, would reduce the government’s high borrowing costs. However, it is unclear how the central bank will force investors to support public finances with lower-than-expected interest rates.
Policy rate steady, citing need to curb economic demand. The standing loan interest rate remains at 14.50%, and the standing deposit interest rate remains at 950 .50%.
Market rates on long-term government debt—bonds and T-bills—approximate the policy rate for these overnight currencies, adding to the government’s ability to cover budget deficits and The burden of refinancing maturing debt.
“If market rates do not fall appropriately as expected, the central bank will be forced to take administrative measures to prevent any inappropriateness in market rates on the path of deflation,” the CBSL said in a statement. Changes. Triggered by the worst financial crisis in seven years and an ill-conceived fertilizer ban imposed last year, which has since been reversed.
A shortage of foreign exchange reserves to pay for essential imports fueled inflation And triggered a sharp devaluation of the currency, which also pushed up prices.
National Consumer Price Index 70 in October was .6% higher than a year ago. But The central bank expects that, if sustained, tight fiscal policy and tight monetary policy will bring annual inflation down to 4-5% by the end of 2023.
Frontier Thilina Panduwawala, head of research at Research, said: “CBSL’s statement is clear, expecting market rates to go downhill in the coming months, especially with slower inflation. “
“The statement was very positive that they were prepared to use non-policy rate tools to drive market rates, including deposit rates,” he added.
Policy rate steady
To keep its policy rate steady, CBSL said: “The Board believes that the current tightening stance of monetary policy is necessary to contain any underlying demand pressures in the economy. “
Thirteen of 15 economists and analysts polled by Reuters forecast policy rates to remain unchanged. CBSL raises it this year a record 950 basis points to combat inflation.
CBSL had previously forecast GDP to fall 8.7% this year compared to 70.
“Economic activity is expected to recover gradually but sustainably, supported by expected improvements in supply conditions, stronger market confidence and the impact of corrective measures implemented to stabilize economic conditions. policy measures,” it said.
Sri Lanka defaulted on external debt repayments in May. It secured a preliminary agreement from the IMF in early September for $2.9 billion However, before starting to pay, the country must put its high debt on a sustainable path.
“Central banks now need Focus on debt restructuring and Sanjeewa Fernando, head of research at CT CLSA Securities: “Get an agreement with the IMF as soon as possible to lower interest rates.”
“This is what will stabilize the economy and bring it back to growth BEST WAY” .