Central Bank maintains policy interest rates at their current levels
By: Staff Writer
January 23, Colombo (LNW): The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 22 January 2024, 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 9.00 per cent and 10.00 per cent, respectively.
The Board arrived at this decision following a comprehensive assessment of domestic and international macroeconomic developments in order to maintain inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach its potential.
The Board took note of the effects of the recent developments in taxation and supply-side factors that are likely to pose upside pressures on inflation in the near term.
However, the Board viewed that the impact of these developments would not materially change the medium-term inflation outlook.
Further, the Board noted the space created by past monetary policy easing measures and the decline in the risk premia attached to government securities for further downward adjustment in market lending interest rates.
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.
Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), was recorded at 4.0 per cent in December 2023, compared to 3.4 percent in November 2023.
Following five consecutive months of deflation, the food category recorded inflation (year-on-year) in December 2023 reflecting mainly the weather-related disruptions, while non-food inflation (year-on-year) moderated 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 the envisaged inflation projections of the Central Bank.
Meanwhile, core inflation (year-on-year) continued to moderate in December 2023, 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 VATexemptions effective 01 January 2024, 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.
Therefore, over the medium term, headline inflation is expected to gradually stabilise around the targeted level of 5 per cent (year-on-year), supported by appropriate policy measures.