Economists See Sri Lanka Cutting Key Rates to Support Recovery

(Bloomberg) – Economists expect Sri Lanka’s central bank to reduce its policy rates further during the rest of this year as faster disinflation helps policymakers support the island nation’s recovery after a tumultuous 2022.

The standing deposit facility rate, currently at 11%, is estimated to decrease by 200 basis point by the end of this year— 50 basis points by September and another 150 basis points in the December quarter, according to the latest median estimates of a Bloomberg survey. The analysts forecast the standing lending facility rate to stay put at 12% for the quarter followed by a cut of 150 basis points by the year-end.

Sri Lanka’s monetary authority slashed key rates last week as price pressures halved in June and the local debt revamp plan cheered investors. The next policy review is scheduled for Aug. 24.

“We expect the CBSL to further cut policy rates by 200 basis points in 4Q,” said Saurav Anand, South Asia economist at Standard Chartered Plc, adding that price pressures are seen moderating to 8.5% in the second half of the year.

The survey showed economists have lowered their outlook on the headline inflation through 2025, with the third and last quarters’ forecasts for this year at 9% and 6.3% respectively.

Fund inflows from multilateral banks, tourism and remittances are easing supply chain constraints and helping keep a lid on prices. The central bank expects inflation to reach single digits in the early third quarter, while the IMF expects the target band of 4%-6% to be reached by early 2025.

The road to recovery for the nation that faced crippling shortages and a debt default last year could be slow due to a weak base and as authorities work toward debt restructuring efforts. Analysts have lowered their growth forecasts through to the first half of next year. For the current year, economists forecast a contraction of 1.9% compared to a growth of 0.7% seen earlier.

“We have cut our 2023 GDP forecast by 2.8% to 1%, due to a disappointing 1Q,” said Alex Holmes, senior economist at Oxford Economics. “That said, there are some green shoots, and we think the outlook for recovery – while tough and slow-going – is not as dire as the IMF’s forecast for a 3% contraction implies.”

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