Sunday, June 4, 2023

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CB maintains interest rates at current level with tight monetary policy.

By: Staff Writer

Colombo (LNW): The Monetary Board of the Central Bank of Sri Lanka decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 15.50 per cent and 16.50 per cent, respectively.

Having considered the recent and expected economic developments, and macroeconomic projections on domestic and global fronts, the Board viewed that the maintenance of the prevailing tight monetary policy stance is necessary.

It was of the opinion that that the monetary conditions must remain sufficiently tight to facilitate the continuation of the ongoing disinflation process amidst the improvements in market sentiments following the finalization of the Extended Fund Facility (EFF) from the International Monetary Fund (IMF) and the downward shift in elevated market interest rates reflecting the falling risk premia

Headline inflation (year-on-year) based on the Colombo Consumer Price Index (CCPI) continued to decelerate for the sixth consecutive month in March 2023.

Despite a sizeable impact from the recent hike in electricity tariffs and envisaged second round effects of previous hikes, headline inflation moderated in March 2023, mainly reflecting a larger-than-expected reduction in food inflation.

Meanwhile, core inflation also decelerated for the sixth consecutive month in March 2023, reflecting the continued moderation in underlying demand pressures in the economy.

A faster deceleration of inflation is expected from April 2023 with the reduction in domestic prices of essentials following the greater pass through of the moderation of global commodity prices and the recent appreciation of the Sri Lanka rupee, and the large disinflationary impact arising from the base effect.

A notable moderation in the yields on government securities was also observed driven by the improvements in market sentiments.

As the broader framework of the envisaged domestic debt optimization operation has now been made public, the large risk premia attached to the government securities are expected to dissipate in the near term, paving the way for other market interest rates that are benchmarked to the yields on government securities to moderate further.

The economy is projected to recover gradually towards the latter part of 2023, supported by improvements in domestic supply conditions, enhancement in business and investor sentiments along with the anticipated improvements in foreign exchange inflows, envisaged reduction of market interest rates, and the impact of policy measures being implemented to strengthen the growth outlook.

The recovery of activity is expected to sustain in the medium term underpinned by the implementation of the economic adjustment programme outlined in the IMF-EFF.

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