CB eases lending and deposit interest rates

The Monetary Board of the Central Bank of Sri Lanka 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, CBSL said in a statement on Thursday.

The decision was taken at the Monetary Board meeting held on May 31, 2023, CBSL said.

The Monetary 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 CBSL said.

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, the bank said.

The bank said in May, headline inflation 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 favorable impact of the statistical base effect.

The full pass through 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 bank added.

Accordingly, as per the latest projections of the Central Bank, headline inflation is forecast to reach single digit levels in early Q3-2023, and stabilize around mid-single digit levels over the medium term, the CBSL 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, the CBSL added.

Both deposit and lending interest rates have continued to adjust downwards with the market guidance provided by the Central Bank along with the improvement in liquidity conditions of the domestic money market, CBSL said. Sri Lanka increased its interest rates in early 2022 to deal with rising inflation.