Central Bank of Sri Lanka further reduces policy interest rates
The Central Bank of Sri Lanka has further reduced policy interest rates by 100 basis points, at the first monetary policy review by the Monetary Policy Board under the Central Bank of Sri Lanka Act, No. 16 of 2023 (CBA).
In this review, the Board decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 10.00 per cent and 11.00 per cent, respectively.
The Board arrived at this decision following a careful analysis of the current and expected developments, including low inflation and benign inflation expectations in the domestic economy, with the aim of stabilising inflation at the envisaged 5 per cent level in the medium term, thereby enabling the economy to reach its potential growth.
The Board expects that this reduction of policy interest rates, along with the significant easing of monetary policy effected previously, including the directions issued by the Central Bank to licensed banks to reduce interest rates, and the significant reduction of risk premia on government securities, would accelerate the downward adjustment in market interest rates, particularly lending rates, in the period ahead.
The financial sector has been urged to pass on the benefits of the continued easing of monetary conditions to individuals and businesses adequately and swiftly, thereby supporting the envisaged rebound of the economy.
The significant deceleration of inflation has helped ease inflation expectations notably Colombo Consumer Price Index (CCPI) (2021=100) based headline inflation (year-on-year) decelerated significantly below the target to 1.3 per cent in September 2023 driven by declines in both food and non-food inflation. Food items recorded deflation (year-on-year) for the third consecutive month in September 2023, while non-food inflation continued to moderate due to the easing of price pressures across many categories of the CCPI basket. CCPI based core inflation (year-on-year), which reflects underlying demand pressures in the economy, also moderated further in September 2023, reinforcing the disinflation process.
However, this disinflation process is expected to turnaround from September 2023, with the dissipating impact of the favourable base, and converge towards the targeted level of inflation.
Nevertheless, if the planned upward adjustments to administratively determined prices and tariffs, including electricity, as well as any tax measures are implemented by the Government, a short-lived upward movement in headline inflation beyond the target is likely in the near term. Headline inflation is expected to stabilise at the target rate of 5 per cent over the medium term as reflected by the latest projections of the Central Bank of Sri Lanka. (Colombo Gazette)
