ECONOMYNEXT – Sri Lanka’s central bank is expected to raise rates by 100 to 150 basis points in 2022, amid external pressure and tighter monetary policy in reserve currencies Saurav Anand Economist, South Asia at Standard Chartered Bank said.
Sri Lanka is expected to raise rates to counter weaknesses in the external sector and debt repayments, Anand told the Sri Lanka Economic Summit 2021, organized by the Ceylon Chamber of Commerce.
He said Sri Lanka’s policy rates even after a 150 basis hike at 7.50 percent would be lower than at the beginning of 2020.
Anand said Sri Lanka’s gross official reserves were down to 2.3 billion US dollars by end October. There was similar level of foreign debt in the ensuring three months.
Sri Lanka also had elevated debt levels.
Sri Lanka cut taxes sharply in 2019 for ‘stimulus’ before the onset of the Coronvirus pandemic.
In 2022 the Fed is also expected to raise rates by 60 basis points. India is also likely to raise rates amid higher inflation, he said.
Fed Chief Jerome Powell has already slowed liquidity injection and indicated they will be ended faster.
Powell has been blowing a global aggregate demand bubble with his injections amid an economic recovery triggering supply chain bottlenecks and until recently has been claiming the inflation is ‘transitory’ analysts say.
This month he said the word transitory should be ‘retired’.
Fed to end injections sooner, ‘retire’ transitory, Powell says as inflation rages in Sri Lanka
Meanwhile Anand said tightening US dollar rates tend to put pressure on emerging market central banks.
Emerging soft-pegged central bank end usually end up in currency crises, by trying to resist anchor currency tightening and sterilizing the balance of payments.
GCC pegged countries and orthodox currency board like Hong Kong however have no external trouble regardless of external or domestic turmoil due to self-correcting interest rates. (Colombo/Dec06/2021)