SL’s inflation will fall faster than expected due to rupee appreciation against dollar –CBSL Governor

By Hiran H.Senewiratne

The country’s inflation will fall faster than expected due to the recent appreciation of the local currency against the US dollar, after a surrender rule was done away with, releasing more dollars to the banking system amid private de-leveraging, Central Bank Governor Dr. P. Nandalal Weerasinghe said.

“This is a recent development. Obviously, the selling rate of the US dollar at commercial banks appreciated to around Rs 348 from around Rs 370 to the US dollar a week earlier, Dr. Weerasinghe said. “The exchange rate pass-through and transmission will take some time, he said. He was addressing the media following the monthly CBSL Monetary Board review meeting on March 3.

Dr. Weerasinghe said: ‘The CBSL Monetary Board has decided to raise the monetary policy stance. There will be an immediate impact though petroleum. When there is a cost- reflective pricing formula, the benefit that can come through exchange rate appreciation should definitely be passed through to the consumer.

‘The Monetary Board at its meeting held on Friday has decided to raise the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 15.50 percent and 16.50 percent, respectively.

‘The new rates will be effective from the close of business on March 3, 2023.’

Earlier, the Central Bank which had been engaging continuously with the IMF in negotiations on the monetary policy stance said the Bank and the global lender had reached a consensus to raise policy interest rates to finalize the IMF debt relief arrangement.

Dr. Weerasinghe added: ‘Given the necessity of fulfilling all the “prior actions” to move forward with the finalization of the IMF’s Extended Fund Facility (EFF) arrangement, the Monetary Board and the IMF staff reached consensus to raise the policy interest rates, in a smaller magnitude, compared to the adjustment which was envisaged during the initial stage of negotiations.

‘The decision to raise policy rates demonstrates Sri Lanka’s commitment to the IMF-EFF arrangement, which has been pursued by the government to ensure stability in the economy on multiple fronts.‘The IMF-EFF arrangement is expected to benefit all stakeholders and bolster confidence, which would help restore stability in the economy on a sustained basis.

‘The Monetary Board believes that today’s decision would pave the way for a faster-than-expected deceleration of inflation and expects a lowering of the spread between policy interest rates and high market interest rates.’