• 1: Waiting for clarity on new govt’s fiscal plans and IMF approach
• 2: Real rates remain elevated, suggesting room for further easing

Sri Lanka’s Central Bank is likely to hold on to policy rates until the Budget 2025 which should provide fiscal targets agreed between the International Monetary Fund (IMF) and the new government, Bloomberg Economics said.

Accordingly, Bloomberg Economics said that the Central Bank held rates on Friday (27), even though it has space to continue easing, suggesting that it prefers to wait for more clarity on the new president’s fiscal plans and his approach toward the IMF.

“Any disagreement between the parties could spook markets and hurt the rupee. We think the CBSL will remain watchful until next year’s budget,” it said.

On Friday, the Central Bank kept the standing lending facility rate and the standing deposit facility rate at 9.25% and 8.25%, respectively.

“We think the uncertainty would persist until the budget exercise for the next year,” it said, adding that the Central Bank will prefer to wait until the budget before resuming easing in the first quarter of 2025.

Further, Bloomberg Economics said that the Central Bank has room to cut rates further while real rates remain elevated, which is damping demand.

Adjusted for inflation, the lending rate is 7.25% on a 12-month forward-looking basis, much higher than a 3.50% average over 2010-19.

“We see the CBSL lowering the lending and deposit rates to 8% and 7%,” it said.

On Thursday (28), speaking to TV Derana, National People’s Power (NPP) Economic Council Chief Prof. Anil Jayanth Fernando said that the new government expects to bring the interim budget for the first quarter of 2025 in November when the new Parliament convenes, while Budget 2025 will be passed in January next year.