Sri Lanka central bank sees no need for further rate hikes this year

Sri Lanka's central bank governor said on Thursday there is no need for additional interest rate increases in 2024, following a series of aggressive hikes aimed at curbing inflation.

Governor P. Nandalal Weerasinghe told Reuters in an exclusive interview that current monetary policy settings are sufficient to anchor price stability, with inflationary pressures easing from recent peaks. The central bank has raised rates by a cumulative 850 basis points since mid-2022, including a 250-basis-point increase in July 2023, to stabilize the economy amid a severe balance-of-payments crisis.

Weerasinghe noted that inflation, which surged to over 70% in 2022, has since moderated to around 5% in recent months, though he cautioned that risks remain due to volatile global food and fuel prices. The governor also highlighted progress in debt restructuring negotiations with creditors, which he described as a critical step toward restoring macroeconomic stability.

The central bank's decision to pause further tightening reflects confidence in the effectiveness of prior measures, though Weerasinghe did not rule out future adjustments if conditions warrant. Sri Lanka's economy contracted by 7.3% in 2022 but is projected to grow modestly this year, supported by IMF-backed reforms and improved external sector dynamics.

The governor's remarks follow recent market speculation about the possibility of additional rate hikes, which had weighed on investor sentiment. Sri Lankan government bonds and the local currency, the rupee, have shown signs of stabilization in recent weeks, aided by IMF disbursements and improved foreign exchange reserves.

Analysts widely expect the central bank to maintain its policy rate at current levels through at least the first half of 2024, barring any significant adverse shocks to inflation or the currency.