USD/LKR: CBSL rate hike rate hike not enough to trigger a reversal of the LKR’s fortunes – Standard Chartered

The Central Bank of Sri Lanka (CBSL) raised both the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 700bps to 13.5% and 14.5%, respectively, at its 8 April monetary policy meeting.

In recent days, USD/LKR has traded towards 315 on the interbank market, albeit with limited liquidity. The large rate hike to provide some near-term support for LKR, but unlikely to resolve structural challenges, in the opinion of economists at Standard Chartered.

CBSL hikes by a steep 700bps

“CBSL raised policy rates by 700bps, more than consensus expectations. We see this decisive policy response as a positive move in response to sharp currency depreciation.”

“We now expect another 200bps of SLFR increases in Q3 (two hikes of 100bps each), after the CBSL pauses for the rest of Q2 to allow monetary policy transmission. This takes our end-2022 SLFR forecast to 16.5% (from 12.5% previously).”

“Friday’s decisive policy move is a clear step in the right direction towards stabilising the exchange rate. However, we do not think the rate hike will be enough to trigger a reversal of the LKR’s fortunes, and it might provide only short-term stability.” 

“The structural demand-supply mismatch for foreign currency is unlikely to be resolved by rate hikes alone, and will likely require external support from multilateral agencies.”