Sri Lanka central bank holds rates steady, says mkt interest rates must fall

© Reuters. FILE PHOTO: People walk past the main entrance of the Sri Lanka's Central Bank in Colombo, Sri Lanka March 24, 2017. REUTERS/Dinuka Liyanawatte

By Uditha Jayasinghe and Swati Bhat

COLOMBO (Reuters) -Sri Lanka's central bank held interest rates steady on Thursday, as widely expected, but said it expected a moderation in market interest rates in line with prevailing policy rates.

The Standing Lending Facility rate was held steady at 15.50% while the Standing Deposit Facility Rate was kept unchanged at 14.50%.

"The Board was of the view that the prevailing tight monetary policy stance is necessary to rein in any underlying demand pressures in the economy," the central bank said in a statement, adding it that expected a moderation in the excessive market interest rates.

"If an appropriate downward adjustment in the market interest rates would not take place in line with the envisaged disinflation path, the central bank will be compelled to impose administrative measures to prevent any undue movements in market interest rates," it added.

Thirteen out of 15 economists and analysts polled by Reuters had forecast the central bank's interest rates to remain unchanged as it waited to see effects of its earlier hikes to filter through to prices and the broader economy.

The CBSL has raised rates by a record 950 basis points this year to battle runaway inflation.

The island nation has been grappling with low foreign exchange reserves for most of the year and has struggled to pay for essential imports. Low import supply has triggered soaring inflation. The currency has depreciated sharply.

CBSL expects the economy to shrink by 8.7% this year, one of the worst full-year slumps on record.

"Economic activity is expected to make a gradual, yet sustainable recovery, supported by envisaged improvements in supply conditions, improved market confidence, and the impact of corrective policy measures being implemented to stabilise the economic conditions," it said in the statement.

Sri Lanka, which defaulted on its foreign debt repayments in May, secured a preliminary IMF deal for a $2.9 billion bailout in early September. However, the country has to put its heavy debt on a sustainable path before disbursements can begin.