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Central Bank maintains key policy rates unchanged well anchoring inflation

By: Staff Writer

May 30, Colombo (LNW): The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at their current levels of 8.50 per cent and 9.50 per cent, respectively.

The Board arrived at this decision, at its meeting held on 27 May 2024, after carefully assessing the current and expected macroeconomic developments and possible risks on the domestic and global fronts with a view to maintaining inflation at the targeted level of 5 per cent over the medium term while supporting the economy to reach its potential, the statement said.

While the medium term inflation outlook remains compatible with the current level of policy interest rates and inflation expectations are well anchored, the Board said it observed the need for a further reduction in market lending interest rates.

This was in line with policy interest rates and other benchmark interest rates, which is imperative for the easing of domestic monetary conditions and domestic economic recovery.

The aim is to provide the previous rate cuts to do their work in bringing down the rest of the market lending rates further as inflation expectations remain well anchored.

After staying the rates, Central Bank Governor Dr. Nandalal Weerasinghe said the Board would like to give more time for market lending rates to adjust to its previous policy actions.

There are long and variable lags between the monetary policy action and their impact on the financial markets and the real economy.

Therefore, he said it is natural for the lending rates, which have already come down substantially, to further respond to more recent policy rate cuts.

The Central Bank in March cut its key policy rate by 50 basis points as inflation remained well below expectations and also to spur economic activities which were crushed by their own follies.

It is increasingly becoming evident that the inflationary spiral back in 2022 and part of 2023 was misread, and reacted by making the monetary policy bone crushingly tight.

That pushed swaths of businesses and people out of business and jobs, tipped scores of people into dire poverty and hunger.

What exacerbated economic hardships were the standard International Monetary Fund prescription which raised taxes to sky high levels, slapped new taxes and tied energy and utilities prices to market prices. And all these policies crushed demand and prolonged an otherwise short term economic dip. Perhaps understanding the folly, the Central Bank changed track and pivoted to cut policy rates from June last year.

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