Sri Lanka’s central bank retains policy rates at current levels

The bank’s monetary policy board aims to maintain inflation at the targeted level of 5 per cent over the medium term.

Recent developments in taxation and supply-side factors would not materially change the medium-term inflation outlook, it noted.

The board underscored that the envisaged benefit of further reduction in market lending interest rates needs to be adequately and swiftly passed on to the businesses and individuals by financial institutions.

Inflation is expected to stabilise at the desired levels as the effects of the recent tax adjustments and supply side disruptions are expected to dissipate in the near term, the central bank said in a release.

Headline inflation, as measured by the year-on-year change in the Colombo consumer price index, was recorded at 4 per cent in December 2023 compared to 3.4 per cent in November. Non-food inflation (year-on-year) moderated in December compared to the previous month.

Despite the recent acceleration, headline inflation remains closer to the inflation target of the central bank and is in line with its envisaged inflation projections, the bank noted.

Meanwhile, core inflation (year-on-year) continued to moderate in December last year compared to the previous month, reflecting the subdued demand pressures in the economy.

Headline inflation is projected to record an upward movement in the near term, as expected, driven mainly by domestic price adjustments due to the increase in the value-added tax (VAT) and the elimination of certain VAT exemptions effective January 1 this year, disruptions to the domestic food supply, and the dissipation of the favourable statistical base effect.

However, this acceleration of inflation in the near term is expected to be short-lived, and the spillover effects of such one-off adjustments are likely to be muted due to subdued underlying demand conditions, the bank said.

The merchandise trade deficit is estimated to have moderated last year compared to 2022, it added.

Fibre2Fashion News Desk (DS)