By Uditha Jayasinghe
COLOMBO, May 28 (Reuters) - Sri Lanka's monetary stance is broadly appropriate, and the country still has strong potential to reach the International Monetary Fund's 3% growth target, the head of the IMF's Sri Lanka mission said on Thursday.
He was speaking two days after Sri Lanka's central bank raised its benchmark policy rate by an unexpectedly large 100 basis points.
The Central Bank of Sri Lanka (CBSL) raised the overnight policy rate to 8.75% from 7.75%, blaming higher inflation
and a depreciating rupee due to the energy price shock triggered by the U.S.-Israeli war with Iran.
Seven out of a dozen economists and analysts polled by Reuters had forecast only a 25 basis-point or slightly higher change to the rate.
On Wednesday, the IMF executive board approved a $700million tranche of its $2.9 billion programme with Sri Lanka, which will help top up reserves that had dropped 3.8% to $6.7 billion last month as Sri Lanka struggles to meet soaring energy costs.
"The monetary stance is broadly appropriate. Inflation is projected to remain around the 5% target, both this year and over the medium term," Evan Papageorgiou, IMF Mission Chief for Sri Lanka, told an online press briefing from Washington.
"And now with prices stabilized and foreign reserves continuing to grow and improving as we have it in the projection, we do not see any evidence of destabilising monetary expansion."
Sri Lanka, fully reliant on imported fuel, has been battered by the Iran war-driven energy shock that has forced a 40% fuel price hike, rationing, and even public holidays on Wednesdays.
Despite the rate hike, Sri Lanka still has to capacity to grow at 3% this year, the IMF official said. The economy grew by 5% in 2025.
"We think that there are good, very strong factors in the economy that continue to push the economic growth forward," Papageorgiou added.
(Reporting by Uditha Jayasinghe, writing by Sakshi Dayal, editing by Susan Fenton)
