Central Bank of Sri Lanka tightens Monetary Policy stance

The Central Bank of Sri Lanka has decided to tighten its Monetary Policy stance, the Bank said today.

The bank said that it has decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each, to 5.00 per cent and 6.00 per cent, respectively.

In addition, the Monetary Board decided to increase the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks (LCBs) by 2.0 percentage points to 4.00 per cent, with effect from the reserve maintenance period commencing on 01 September 2021.

These decisions were made with a view to addressing the imbalances on the external sector of the economy and to preempt the buildup of any excessive inflationary pressures over the medium term, amidst improved growth prospects.

The bank said that supported by fiscal and monetary stimulus measures, the Sri Lankan economy is gradually making headway following the setback in 2020.

As per the estimates published by the Department of Census and Statistics (DCS), the economy witnessed a stronger than expected recovery during the first quarter of 2021, recording a real growth of 4.3 per cent, year-on-year.

The economy is poised to record a higher growth rate during the second quarter of 2021, partly due to the sharp contraction observed in the corresponding quarter of the previous year.

Possible disruptions to domestic economic activity from the re-emergence of the COVID-19 pandemic and related preventive measures could weaken the recovery to some extent during the second half of 2021.

Nevertheless, with the successful rolling out of the national COVID-19 vaccination programme and the Government’s strategy to impose only selective mobility restrictions, the momentum of activity is expected to sustain in the period ahead, the Central Bank said.

The bank said that available indicators and projections suggest that the real economy would grow over 5 per cent in 2021, and this momentum would be sustained over the medium term.

The Central Bank said it will continue to monitor domestic and global macroeconomic and financial market developments and take appropriate measures to ensure that the economy reverts to its potential, while maintaining inflation in the targeted 4-6 per cent range under its flexible inflation targeting framework. (Colombo Gazette)