Sri Lanka maintains policy rates, current monetary policy stance is appropriate

Sri Lanka’s Central Bank releasing the monetary policy review on Tuesday said considering developments in the domestic and international macroeconomic environment it has decided to maintain current policy interest rates as the current monetary policy stance is appropriate.

Accordingly, the Monetary Board has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.25 percent and 8.75 percent, respectively while the Statutory Reserve Ratio remains at 7.50 percent.

Releasing the policy stance, the Central Bank said the decision of the Monetary Board is consistent with the objective of maintaining inflation at mid-single digit levels over the medium term and thereby facilitating a sustainable growth trajectory.

Weather related disruptions weighed negatively on domestic food prices raising the headline inflation which is supply driven and is of short term nature, the Bank said.

The Central Bank expects the inflation to moderate from December 2017 and reach the desired levels in 2018, underpinned by appropriate monetary conditions as well as the dissipation of the ‘one-off’ effects of tax revisions on inflation.

In the external sector, the improvement in export performance during the first eight months of the year was outweighed by the notable increase in import expenditure, particularly on fuel, rice, and gold. Accordingly, the cumulative trade deficit widened during the first eight months of the year.

Although tourist arrivals and associated foreign exchange inflows grew on a cumulative basis, workers’ remittances continued its declining trend mainly due to geo-political uncertainties in the Middle East.

The rupee denominated government securities market and the Colombo Stock Exchange (CSE) continued to attract foreign inflows.

Amidst these developments, the Central Bank’s cumulative purchases of foreign exchange from the domestic market exceeded US dollars 1.2 billion on a net basis, and gross official reserves improved to US dollars 7.5 billion by end October 2017 from US dollars 6.0 billion at end 2016.

With increased flexibility in the determination of the exchange rate, the pressure in the domestic foreign exchange market has eased considerably. This has limited the cumulative depreciation of the Sri Lankan rupee against the US dollar to 2.5 percent in the first 10 months of the year, in comparison to the depreciation of 3.8 percent observed during the year 2016.

Amidst these developments, the Monetary Board has decided to maintain the current monetary policy stance as it is appropriate.