• Says inflation is declining but remains at very high-level disproportionally hurting the poor 
• Warns upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy
• Stresses CBSL’s decision shows commitment to reduce inflation more quickly and firmly towards single-digit target

The International Monetary Fund (IMF) on Saturday justified the 1% policy rate hike by the Central Bank of Sri Lanka (CBSL) as “appropriate” though the banking industry, private sector and analysts were surprised by the move.

Dear all, in response to media requests for our comments on CBSL’s rate hike on 3 March, please find our comments below, attributable to: 

“The CBSL’s decision to raise the policy rate is appropriate and in line with its objectives set under the inflation targeting framework,” IMF Senior Mission Chief for Sri Lanka Peter Breuer and Mission Chief for Sri Lanka Masahiro Nozaki said in response media requests for comments on CBSL’s decision on Friday to increase Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points to 15.50% and 16.50%, respectively.

The IMF said CBSL’s move reflects the latter’s commitment to the inflation target and is an important part of the disinflation strategy in the Extended Fund Facility (EFF) program, which is fully committed by the Sri Lankan authorities and supported by the IMF.

The IMF said Sri Lanka’s inflation is declining but remains at a very high-level, which has been disproportionately hurting the poor and the upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy. 

“Therefore, 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,” the IMF officials added. 

On Friday, speaking during the post Monetary Policy Review meeting, CBSL Governor Dr. Nandalal Weerasinghe said that the hike was a compromise aimed at addressing inflation expectations. He also expressed confidence that the hike will help lower the spread between policy interest rates and high market interest rates at present. 

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