IMF praises Sri Lanka’s decision to raise policy rate

The International Monetary Fund (IMF) today praised the Central Bank of Sri Lanka’s (CBSL) decision to raise the policy rate and said it “shows its commitment to reduce inflation more quickly and firmly towards the single-digit target.”

“CBSL’s decision to raise the policy rate is appropriate and in line with its objectives set under the inflation targeting framework,” Peter Breuer, Senior Mission Chief for Sri Lanka, and Masahiro Nozaki, Mission Chief for Sri Lanka said in a statement.

The CBSL yesterday raised policy interest rates by 100 basis points, though many predicted the monetary authority to either maintain the status quo or signal a dovish tilt by cutting rates.

“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 the IMF,” the IMF statement said.

“Sri Lanka’s inflation is declining but remains at a very high level, which has been disproportionately hurting the poor,” the IMF said.

“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.”