The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) recently announced a substantial reduction in both the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points each, setting them at 9.00% and 10.00%, respectively.
This decision, made during their November 23 meeting, stems from a comprehensive evaluation of the local and global economic landscapes. The primary objective remains stabilizing inflation at 5% over the medium term while aiding the economy in reaching its potential level.
Acknowledging potential inflationary pressures due to forthcoming domestic and global factors, the Board remains confident that these short-term risks won’t significantly alter the medium-term inflation outlook. This conviction arises from the public’s anchored inflation expectations and the anticipation of subdued economic activity in the near to medium term.
Having implemented multiple monetary policy measures since June 2023, the Board believes that sufficient monetary easing has been executed to stabilize inflation over the medium term. Consequently, they stress the urgency for financial institutions to swiftly and fully pass on these easing measures to market interest rates, especially lending rates, facilitating a rapid normalization of these rates in the foreseeable future.
The CBSL’s recent data highlights a persistently low headline inflation, with October 2023 figures indicating a marginal increase from previous months. Notably, food inflation remained negative for the fourth consecutive month. Core inflation, reflecting underlying demand pressures, further eased in October, aligning with the overall subdued demand in the economy.
Anticipating a temporary uptick in inflation due to upcoming changes in Value Added Tax (VAT) effective January 2024, the CBSL expects this rise to be short-lived, supported by subdued demand pressures. They reiterate confidence in inflation converging towards the targeted 5% level over the medium term, backed by appropriate policy actions.
Market interest rates are forecasted to normalize in the coming period, with noticeable adjustments already observed. With policy rate cuts, credit to the private sector expanded in September and October 2023, signaling a positive impact on market lending rates. This easing of rates is expected to stimulate further private sector credit, fostering the envisioned revival of domestic economic activity.
