Central Bank of Sri Lanka relaxes its monetary policy stance

The Central Bank of Sri Lanka has relaxed its monetary policy stance in line with the faster than expected slowing of inflation.

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 31 May 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 250 basis points to 13.00 per cent and 14.00 per cent, respectively.

The Board arrived at this decision with a view to easing monetary conditions in line with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations.

The commencing of such monetary easing is expected to provide an impetus for the economy to rebound from the historic contraction of activity witnessed in 2022, while easing pressures in the financial market, the Central Bank said.

Headline inflation (year-on-year), based on the Colombo Consumer Price Index (CCPI), continued the deceleration path, faster-than-projected earlier, supported by the lagged impact of tight monetary and fiscal policies, strengthening of the Sri Lanka rupee, reduction in fuel and gas prices, normalisation of food prices and the favourable impact of the statistical base effect.

The full passthrough of the large appreciation of the exchange rate observed recently is yet to be reflected in the price levels, and it would quicken the disinflation process, as the prices of imported goods are expected to decline further in the period ahead.

The favourable statistical base effect due to large month-on-month inflation that materialised during the last year is expected to slow inflation significantly in the next few months as well.

Accordingly, as per the latest projections of the Central Bank, headline inflation is forecast to reach single digit levels in early Q3-2023, and stabilise around mid single digit levels over the medium term. (Colombo Gazette)