Central Bank of Sri Lanka Maintains Key Interest Rates – Lanka Business Online

The Monetary Board of the Central Bank of Sri Lanka, at its meeting on October 5, 2022, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Bank central to their current levels of 14.50. percent and 15.50 percent, respectively. In reaching this decision, the Board took into account the latest macroeconomic conditions, expected developments and macroeconomic projections.

The Board noted the tight monetary conditions currently prevailing, the deceleration in the pace of inflation and the projected path of disinflation in the near term, supported by both domestic and global factors. The Board of Directors considered that monetary conditions remained sufficiently restrictive to achieve the disinflation path envisaged in the period ahead. Tight fiscal policies would complement the effects of tight monetary policy measures already in place, helping to ease any buildup of aggregate demand pressures, thereby anchoring inflation expectations and bringing headline inflation back to the target level of 4-6% over the medium term.

Domestic economic activity is expected to remain subdued in 2022, before recovering in 2023 According to GDP estimates released by the Census and Statistics Department (DCS), the real economy is expected to have contracted by 4.8% in first half of 2022, on an annual basis. The economy is also expected to contract in the second half of 2022, impacted by tighter monetary and fiscal conditions, as well as continued supply-side constraints and uncertainty surrounding the business environment amid currency shortage in the national foreign exchange market, among others.

However, a recovery in economic activity is expected in 2023 with the envisaged improvements on the supply side, as well as the timely implementation of the required reforms. Economics Department 06.10.2022 2 Credit to the private sector continues to contract due to tightening monetary and liquidity conditions by the Central Bank.

With relatively high interest rates on deposits offered by licensed banks, there is also a return of money into circulation in the banking system. In August 2022, the stock of credit extended to the private sector by commercial banks contracted for the third consecutive month in absolute terms, reflecting the impact of higher effective market lending rates, a moderation of economic activity and measures to reduce non-emergency imports.

As a result, the current downward trend in year-on-year credit growth to the private sector is expected to continue for the remainder of the year, while a similar trend is also expected for growth in the money supply to the private sector. broad sense (M2b).

In the meantime, the need for additional monetary financing should gradually decline, supported by the envisaged fiscal consolidation measures and the planned reforms of large public enterprises. Headline inflation is expected to follow a short-term disinflationary path Headline inflation, based on the Colombo Consumer Price Index (ICCP), increased slightly in September 2022, driven mainly by the recent revision of air tariffs. electricity and water and the increase in Value Added Tax (VAT).

However, headline inflation is expected to follow a disinflationary path in the period ahead. Moderate aggregate demand pressures resulting from tight monetary and fiscal conditions, expected improvements in domestic supply conditions, normalization of world food and other commodity prices, and the timely pass-through of these reductions in domestic prices, as well as the favorable statistical base effect, will play a decisive role. reduce inflation over the medium term.

Comments are closed.