Central Bank of Sri Lanka relaxes monetary policy stance

02 Jun '23

2 min read

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Insights

The Central Bank of Sri Lanka's monetary board recently reduced the standing deposit facility rate and the standing lending facility rate by 250 basis points to 13 per cent and 14 per cent respectively to ease monetary conditions in line with the faster-than-expected slowing of inflation.
Economic activity is likely to rebound gradually from late 2023.

The monetary board of the Central Bank of Sri Lanka, at its meeting held on May 31, decided to reduce the bank’s standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) by 250 basis points to 13 per cent and 14 per cent respectively.

The decision was taken to ease monetary conditions in line with the faster-than-expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations, the bank said in a statement.

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 markets, it noted.

Inflation is projected to decelerate notably in the period ahead, reaching single digit levels earlier than expected in the third quarter this year, and stabilise around mid-single digit levels over the medium term.

The external sector, which witnessed an unprecedented setback in 2022, has started demonstrating improved performance, the central bank said.

During the four months ending April 2023, the trade deficit decreased notably, compared to a year earlier, reflecting mainly the subdued import expenditure, which outweighed the impact of moderation of external demand for merchandise exports.

The downward adjustment in market interest rates will accelerate in line with the envisaged single digit inflation, thereby supporting credit to the private sector and softening the pressures in the financial sector, it noted.

Net credit to the government by the banking system that notably expanded in 2022 is expected to moderate with the receipt of substantial foreign financing to the government.

Meanwhile, credit to state-owned business enterprises (SOBEs) by the banking system is expected to reduce significantly in the period ahead, underpinned by the cost recovery pricing adopted by major SOBEs.

As reflected by leading indicators, economic activity remains subdued thus far during 2023, reflecting the protracted impact of the severe economic stresses in 2022 and the resultant tighter monetary and fiscal policies needed to support the restoration of macroeconomic stability.

Domestic economic activity is expected to rebound gradually from late 2023, supported by easing of monetary conditions, improvements in business and investor sentiments along with the realisation of improved foreign exchange inflows, the faster recovery of the tourism sector and the implementation of growth promoting policy measures, the central bank added.

Fibre2Fashion News Desk (DS)