CBSL envisages disinflation path in the near term supported by both domestic and global factors

By Hiran H. Senewiratne

Sri Lanka’s present high inflation rate is likely to come down early next year with the Central Bank’s certain policy decisions, which was considered to be the number one enemy for the downturn of the economy, Central Bank Governor Dr Nandalal Weerasinghe said in Colombo yesterday.

“The tight monetary conditions prevailing at present, the accelerating pace of inflation, and the envisaged disinflation path in the near term would be supported by both domestic and global factors,” Governor said at the seventh monetary policy review held at the Central Bank auditorium.

The Governor said that the Monetary Board has decided to continue the current monetary policy stance. monetary conditions remain sufficiently tight to achieve the envisaged disinflation path in the period ahead and by early next year inflation will come down to a manageable level.

” At present inflation is driven by food inflation and energy and transport also contributing to it with the increase of tariff on energy and fuel. Therefore, inflation is right now 69.8 percent, which will come down gradually and need to brought down to manage all economic issues, ” Dr Weerasinghe said.

The Governor added, “The  contractionary fiscal policies would complement the effects of tight monetary policy measures already in place, helping to mitigate any build-up of aggregate demand pressures, thereby anchoring inflation expectations and bringing down headline inflation to the targeted level of 4-6 percent over the medium term,”

The real economy is estimated to have contracted by 4.8 percent in the first half of 2022, on a year-on-year basis and the economy is expected to contract in the second half of 2022 as well, while headline inflation is expected to follow a dis-inflationary path in the near term, he said.

Accordingly, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 October 2022, has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 percent and 15.50 percent, respectively he said.

In arriving at this decision, the Board considered the latest macroeconomic conditions, expected developments and macroeconomic projections, The Board expects the domestic economic activity to remain subdued during 2022, before recovering in 2023, .Central Bank Governor said.

The Board was of the view that the recently introduced tight fiscal policy measures would also help curtail any further build-up of demand pressures in the economy, complementing the effects of tight monetary policy already in place, Dr Weerasinghe said. The Central Bank said it will continue to monitor macroeconomic conditions and expected developments on the domestic and global fronts and stand ready to take measures swiftly and proactively, as appropriate, Governor added.