Sri Lanka’s central bank governor said monetary policy is “appropriate” right now, as the South Asian nation’s economy and inflation are moving in line with their goals.

The Central Bank of Sri Lanka held the overnight policy rate at 8% for the second straight meeting this year on Wednesday. The move was in line with the forecast of most of the economists surveyed by Bloomberg.

The monetary policy is transmitting into the economy “nicely” and inflation will come back into “positive territory” from the second half of the year,” Governor P. Nandalal Weerasinghe told Bloomberg TV’s Haslinda Amin in an interview on Wednesday. “So we thought this is the right, appropriate policy stance for the time being.”

Sri Lanka’s economy expanded 5% last year, bouncing from a contraction of 2.3% in 2023, and is expected to sustain the pace in the current year. However, the monetary authority will “closely” monitor the risks from the possible impact of volatile commodity prices and US President Donald Trump’s tariffs, the governor said. 

A $3 billion bailout from the International Monetary Fund has helped in stabilizing Sri Lanka’s cash-strapped economy. Since the historic default in 2022, authorities have raised taxes and unveiled measures to keep up with the conditions of the lender’s loan program. The country needs to increase energy prices and meet fiscal parameters for further aid, the IMF recently said. 

The country will have “to stay” the course to meet the revenue-based fiscal consolidation targets and deliver on the promised governance reforms, Weerasinghe said. 

“There’s a lot of confidence and assurance from the administration that they’ll move in the same direction,” he said.

What Bloomberg Economics Says 

The policy rate is at an appropriate level, based on our estimates of inflation and the output gap. Any easing beyond this point could cause the economy to overheat — leading to an undesirable jump in imports which would pressure FX reserves and hit the rupee. We doubt the central bank will want to risk those events.

Ankur Shukla, economist

Sri Lanka secured about $334 million in loans from the IMF on Feb 28. The nation is also in the process of signing debt restructuring agreements with bilateral partners in the official creditor committee such as India and members of the Paris club, the governor said. 

Source: Bloomberg
--Agencies