By Uditha Jayasinghe
COLOMBO, November 22 (Reuters) – Sri Lanka’s central bank is expected to hold interest rates steady on Friday as it awaits progress on debt restructuring, seen as key to receiving the second tranche of a $2.9 billion IMF bailout package.
The median forecast in a Reuters poll of 15 economists and analysts is for the Standing Deposit Facility Rate (SDFR) to remain at 10% and the Standing Lending Facility Rate (SLFR) at 11%.
However, there is room for a rate cut of 50-100 basis points, according to six of the analysts surveyed, who cited moderating inflation and falling government borrowing costs as incentives for the Central Bank of Sri Lanka (CBSL) to do so.
The CBSL increased rates by a total of 10.5 percentage points through March to contain inflation and rebuild reserves to shore up its currency, after the economy tanked last year in the country’s worst financial crisis in more than seven decades.
Since June, however, the CBSL has reduced rates by a total of 550 basis points, including a 100 basis point cut in October, as the economy stabilized following an IMF bailout in March.
“This rate decision is difficult. Typically the CBSL expects policy decisions to filter through markets,” said Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers.
“We feel they will also expect more direction from the IMF and progress on debt restructuring and cut rates by around 100 basis points in early 2024.”
Sri Lanka expects the IMF’s executive board to approve the first review of the bailout until Dec.6 after receiving more clarity on its debt restructuring talks with major bilateral creditors. The approval would unlock $330 million in funding and signal progress for the four-year program.
The CBSL forecast that Sri Lanka’s economy will shrink 2% this year after a 7.8% contraction in 2022. The World Bank, however, predicts a 3.8% contraction in 2023.
“Growth in the third quarter will be positive, but it will have to be around 3% in the third and fourth quarters to meet CBSL’s target, which is unlikely,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.
The policy decision will be at 7:30 am (0200 GMT) on Friday.
For individual contributions, please see table below:
organization
SDFR
SLFR
sharpness
9.50%
10.50%
Advocate Institute
10%
11%
CAL Group
10%
11%
HSBC
10%
11%
First Capital
10%
11%
Asha Securities
10%
11%
Capital Economy
9.50%
10.50%
Standard Chartered
–
10%
University of Colombo
9%
10%
SC Securities
10%
11%
Frontier Research
9%
10%
Asian Securities
9%
10%
JB Securities
10%
11%
Softlogic Traders
10%
11%
Almas Group
10%
11%
Median
10%
11%
(Reporting by Uditha Jayasinghe Editing by Shri Navaratnam)
((Uditha.Jayasinghe@thomsonreuters.com;))
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