Economic Analysis - Maintaining Rate Hike Outlook For 2018 - MAY 2018


BMI View: The Central Bank of Sri Lanka left its policy rates unchanged during its February meeting and sounded neutral. However, we continue to expect 50bps worth of interest rate hikes by end-2018, bringing the repo and reverse repo rates to 7.75% and 9.25%, respectively, as the central bank seeks to manage inflationary pressures and grow its foreign reserve position amid an improving economic growth outlook.

The Central Bank of Sri Lanka (CBSL) left its benchmark Standing Deposit Facility (repo) and Standing Landing Facility Rates (reverse repo) unchanged at 7.25% and 8.75%, respectively, at the February 15 monetary policy review meeting and sounded relatively neutral. It noted that inflation has slowed, while the economy 'is currently operating at a level below its potential'. Despite this, we continue to believe that the CBSL will raise interest rates by 50bps by end-2018, bringing the repo and reverse repo rates to 7.75% and 9.25%, respectively, as the central bank looks to keep inflation within its 4.0-6.0% target range and to build up foreign reserves as per IMF requirements. To some extent, the strengthening economic growth momentum should allow the monetary authority to focus on reining in inflationary pressures and stabilising the currency.

Inflationary Pressures Likely To Continue

Money Supply Growth Continues To Outpace Nominal GDP Growth
Sri Lanka - Nominal GDP Growth, Wage Growth, Money Supply Growth, % chg y-o-y
BMI, Central Bank of Sri Lanka

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