By:Staff WriterColombo (LNW): Sri Lanka central bank in a surprise move, slashed the standing deposit facility rate and standing lending facility rate by 250 basis points– to 13 percent and 14 percent, respectively, from 15.5 percent and 16.5 percent recently.
It was the first unscheduled, rate cut after three years, and it also marks the biggest one-time cut since then to give the economy a jolt in the face of concerns about the present economic crisis.
Although the fundamentals of the US economy remain strong, “the coronavirus poses evolving risks to economic activity,” the central bank said in a statement.
The financial markets are functioning normally, the economy continues to perform well, and that the island nation expects to fully recover after the economic down turn ends following social- economic and political stabilization.
The emergency rate cut came as somewhat of a surprise: Although the stock market soared Monday in expectation of a rate cuts sometimes back, the central bank had seemingly dismissed the notion till the imposing of latest rate cut.
The licensed commercial banks are now compelled to bring down the lending rate for businesses following the relaxation of the Central Bank’s monetary policy stance.
The central bank expressed confidence in bringing down the inflation to a single digit soon as it is now moving towards the target range much earlier than expected, supported by the currency appreciation, the decline in the fuel and petroleum prices and global prices. .
Inflation, which hit a new high of about 70 percent in September last year, is decreased to 25.2 percent in May 2023 from 35.3 percent in April 2023 and, government revenues are increasing with tax reforms.
The central bank has allowed the rupee to appreciate from around Rs. 360 to the US dollar in March to around Rs 290 to the US dollar up to now without intervening the market enabling the monetary authority continues to build reserves.
It has bought dollars amounting to US$ 662 million in May and a total of net purchasing was in the region of $ 1,671 up to now to build reserves preventing excessive volatility.
The Colombo stock market has regained momentum with investor sentiment getting a boost from the central bank policy rate cut.
After several sessions of subdued investor activity, the market took a buoyant note as investors drew inspiration from the unprecedented 250bps policy rate cut announced by the CBSL several market dealers divulged.
More importantly, this move highlighted a significant shift by the CBSL, breaking away from a tight monetary stance maintained for almost two years,” they said.
”The central bank now expects the Average Weighted Prime Lending Rate AWPLR to decline to 11% by 2023, compared to previous forecast of 15%, and the CPI headline inflation to ease to 5% by 2023, down from our previous forecast of 9.8% as the policy rate cut will help lower the cost of borrowings and stimulate domestic demand,” several finance ministry top officials said.
The Central Bank now appears to be leaning more towards rebooting growth while keeping monetary authority closer tab on the hard won economic stability, which until recently was given priority when making policy decisions.
Banks will transmit and bring down, specially the lending rates to businesses,” they said calling for faster pass through of the policy action via banks to help realize Central Bank’s expectations for the economy.
Although the central bank had earlier projected 2.0 percent contraction in the economy in 2023, it now expects the growth to land somewhere close to zero level by the end of the year supported by the growth expected in the back half of the year, potentially fully offsetting the contraction projected for the first half.