Sri Lankan Interest Rate Cut
March 26, 2024
An unexpected interest rate cut was undertaken by the Central Bank of Sri Lanka, whose Standing Deposit Facility Rate was cut to 8.5% from 9.0%. The rate has been on a roller coaster ride since its pandemic low of 4.5% from July 2020 to August 2021. An initial hike took it to 5.0% for the final third of 2021. A further 950 basis points of increase during 2022 was culminated by a a percentage point hike in March 2023 to 15.5%.was cut by 650 basis points last year between March and November when it was raised to 5.0%. A further 950 basis points of increase during 2022 was culminated by a a percentage point hike to 15.5% in March 2023. An interest rate downcycle commencing last July took the rate to 9.0% by November but then paused while officials monitored the effect on inflation of a 3-percentage point hike in value added tax.
The wide gyrations in Sri Lanka’s interest rate mirror consumer price inflation which accelerated from 3.1% in the first month of 2021 to 67.4% in September 2022 but then receded to 1.3% by September 2023. After rebounding to 6.4% this past January, inflation receded last month to 5.9%, which still exceeds the central bank’s medium term target of 5%. A statement explaining today’s action observes well-anchored inflation expectations and opines that possible upside risks to inflation in the near term would not materially change the medium-term inflation outlook, as economic activity is projected to remain below par for an extended period.” More rate normalization is coming.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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