Sri Lanka cuts policy rates by 250 bp to reduce inflation and boost economic recovery

(LANKAPUVATH | COLOMBO) – The Monetary Board of Sri Lanka’s Central Bank has decided to relax monetary policies and reduce policy interest rates aiming to gradually ease inflationary pressures and to aid recovery of economy, the Central Bank said in its monetary policy review on Thursday.

Accordingly, the Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 31 May 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 250 basis points to 13.00 percent and 14.00 percent, respectively.

The Board arrived at this decision with a view to easing monetary conditions in line with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations, the Central Bank said.

“The commencing of such monetary easing is expected to provide an impetus for the economy to rebound from the historic contraction of activity witnessed in 2022, while easing pressures in the financial markets.”

Inflation is projected to decelerate notably in the period ahead, reaching single digit levels earlier than expected. Headline inflation is forecast to reach single digit levels in early Q3-2023, and stabilize around mid-single digit levels over the medium term.

The external sector, which underwent an unprecedented setback in 2022, begins to demonstrate improved performance

The continuation of the IMF-EFF supported program, further financial assistance from international development partners, such as the Asian Development Bank (ADB) and the World Bank, and renewed investor appetite, coupled with the advances in the debt restructuring process, are expected to ease the BOP constraint significantly in the period ahead, supporting the recovery in domestic economic activity.

“The downward adjustment in market interest rates will accelerate in line with the envisaged single digit inflation, thereby supporting credit to the private sector and softening the pressures in the financial sector,” the Bank said.

Furthermore, domestic economic activity is expected to rebound gradually from late 2023.

“Faster deceleration of inflation and lower probability of excessive demand pressures during the economic rebound phase creates space for a gradual policy relaxation in the period ahead,” the Monetary Board said in its review.




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