CBSL to maintain ‘dovish monetary policy in view of economic stabilization’

By Hiran H.Senewiratne

Sri Lanka’s current inflation rate is around 1.3 percent and with the stabilizing of the economy the Central Bank is to maintain a dovish monetary policy stance, Central Bank Governor Dr. Nandalal Weerasinghe said.

“The Central Bank has signed an agreement with the government to maintain inflation at 5 percent with a 2 percent variation. The inflation target is 5 percent, plus or minus 2 percent. The variation would be assessed on the basis of the quarterly average of two quarters. If there is a deviation it will trigger other actions, Dr. Weerasinghe said at the media conference subsequent to the monthly Monetary Policy Review meeting. The event was held at the Central Bank auditorium in Colombo yesterday.

Dr. Weerasinghe added: “The agreement will be published soon by the Finance Ministry. Under the new flexible inflation targeting law, the Central bank has to sign an agreement with the government to maintain inflation at a specific level.

“The Monetary Board of the Central Bank has decided to reduce policy interest rates, aiming to enable the economy to reach its potential as inflation has declined faster than expected.

“Accordingly, at the first monetary policy review by the Monetary Policy Board under the Central Bank of Sri Lanka Act No. 16 of 2023 (CBA) on Thursday, the Board had decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 10.00 percent and 11.00 percent, respectively.

“The Board arrived at this decision following a careful analysis of current and expected developments, including low inflation and benign inflation expectations in the domestic economy, with the aim of stabilizing inflation at the envisaged 5 percent level in the medium term.

“The significant reduction of risk premiums on government securities, would accelerate the downward adjustment in market interest rates, particularly lending rates, in the period ahead.

“The Board expects domestic economic activity to rebound gradually during the second half of 2023 and sustain the recovery over the medium term, while the external sector is expected to remain resilient in the period ahead.

“The Monetary Board anticipates a swift and sizeable reduction in overall market lending interest rates in line with monetary policy easing measures.

“The Central Bank urged the financial sector to pass on the benefits of the continued easing of monetary conditions to individuals and businesses adequately and swiftly, thereby supporting the envisaged rebound of the economy.

“The Central Bank will continue to closely monitor the developments in market lending interest rates and review the administrative measures appropriately.

“The Monetary Policy Board will continue to assess risks to the inflation outlook, among others, and stand ready to take appropriate measures to maintain domestic price stability in the period ahead, while supporting the economy to reach its potential.”