Central Bank of Sri Lanka further reduces policy interest rates

Domestic economic activity is expected to recover gradually towards late 2023 and sustain the recovery, thereby helping to reach the potential level of economic growth over the medium term, the bank noted in a release.

This decision, the reduction of policy interest rates by 250 bps in early June this year and the significant reduction of risk premia on government securities recently will lead to market interest rates, particularly lending rates, adequately and swiftly adjusting downwards, the bank said.

The bank urged the banking and financial sector to pass on the benefits of this decision to individuals and businesses, thereby supporting economic activity to rebound in the period ahead.

The disinflation process continues, firming inflation expectations that would help stabilise inflation at mid-single digit levels in the medium term, it said.

Colombo consumer price index (CCPI)-based headline inflation decelerated year on year further in June this year to 12 per cent, reflecting easing price pressures across many categories.

CCPI-based core inflation (year-on-year) moderated to single digit levels in June, reinforcing the disinflation process.

The full pass-through of the appreciation of the Sri Lanka rupee against the US dollar thus far this year is yet to be reflected in the price levels, a factor that could further support the disinflation process, the bank observed.

Headline inflation is expected to decelerate further and reach single-digit levels by early third quarter this year and stabilise around mid-single digit levels over the medium term.

The trade deficit decreased notably during the five months ending May 2023 with a significant decrease in merchandise imports, despite some setback in merchandise exports, reflecting the moderation of global demand.

The liquidity conditions in the domestic foreign exchange market continued to improve in recent months supported by increased forex inflows.

Fibre2Fashion News Desk (DS)