IMF commends Central Bank’s decision to raise policy interest rates

The International Monetary Fund (IMF) has commended the decision taken by the Central Bank of Sri Lanka (CBSL) to raise the policy interest rates, saying that it is appropriate and in line with its objectives.

“It reflects CBSL”s commitment to the inflation target and is an important part of the disinflation strategy in the EFF program, which is fully committed by the Sri Lankan authorities and supported by IMF,” Senior Mission Chief for Sri Lanka, Peter Breuer and Mission Chief for Sri Lanka, Masahiro Nozaki said in a joint statement.

They remarked that Sri Lanka’s inflation is declining but remains at a very high level, which has been disproportionally hurting the poor. 

As upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy, the IMF officials said the CBSL’s decision to raise the policy rate shows its commitment to reduce inflation more quickly and firmly towards the single-digit target.

“Durable disinflation would help boost market confidence, reduce excessive risk premia and ease the financing conditions for the corporates, especially the small and medium enterprises, which supports recovery.”

This statement comes a day after the CBSL announced its Monetary Board’s decision to raise the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points.

Accordingly, the SDFR and the SLFR were moved up to 15.50% and 16.50%, respectively, with effect from the close of business on Friday (March 03).

The decision was taken in a bid to fulfill the prerequisites required to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement Sri Lanka currently awaits.

The CBSL assured that the Monetary Board and the IMF staff reached a consensus to raise the policy interest rates in a smaller magnitude compared to the adjustment envisaged during the initial stage of negotiations.