CB reduces interest rates
The Monetary Board of the Central Bank has decided to reduce the Standing Deposit Facility Rate and the Standing Lending Facility Rate by 200 basis points to 10.00 percent and 11.00 percent respectively, a statement from it said on Thursday.
The central bank said it took this decision at the monetary board meeting held on Wednesday.
The central bank said the monetary board arrived at this decision following a careful analysis of the current and expected developments, including low inflation and benign inflation expectations in the domestic economy, with the aim of stabilizing inflation at the envisaged five percent level in the medium term, thereby enabling the economy to reach its potential growth.
The monetary board expects that this reduction of policy interest rates, along with the significant easing of monetary policy effected previously, including the directions issued by the Central
Bank to licensed banks to reduce interest rates, and the significant reduction of risk premia on government securities, would accelerate the downward adjustment in market interest rates, particularly lending rates, in the period ahead.
The central bank said the financial sector is urged 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.
Colombo Consumer Price Index (CCPI) based headline inflation (year-on-year) decelerated significantly below the target to 1.3 per cent in September 2023 driven by declines in both food and non-food inflation, the central bank said.
Sri Lanka increased its interest rates significantly in 2022 to deal with rising inflation, however rates were reduced twice in 2023.
Food items recorded deflation (year-on-year) for the third consecutive month in September 2023, while non-food inflation continued to moderate due to the easing of price pressures across many categories of the CCPI basket. CCPI based core inflation (year-on-year), which reflects underlying demand pressures in the economy, also moderated further in September 2023, reinforcing the disinflation process.
However, this disinflation process is expected to turnaround from September 2023, with the dissipating impact of the favourable base, and converge towards the targeted level of inflation, the central bank said.
Nevertheless, if the planned upward adjustments to administratively determined prices and tariffs, including electricity, as well as any tax measures are implemented by the Government, a short-lived upward movement in headline inflation beyond the target is likely in the near term. Headline inflation is expected to stabilise at the target rate of 5 per cent over the medium term as reflected by the latest projections of the Central Bank.