Central Bank reduces interest rates

The Central Bank on Friday dropped interest rates by 100 basis points (1 per cent) according to a decision take by its Monetary Policy Board.

In a statement, the banking regulator said it was decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 9.00 per cent and 10.00 per cent, respectively.

The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic and global economy, with the aim of achieving and maintaining inflation at the targeted level of 5 per cent over the medium term.

The statement said the Board took note of possible upside risks to inflation projections in the near term due to supply-side factors stemming from the expected developments domestically and globally. However, the Board viewed that such near term risks would not materially change the medium-term inflation outlook, as inflation expectations of the public remain anchored and economic activity is projected to remain below par in the near to medium term. Further, the Board viewed that with this reduction of policy interest rates, along with the monetary policy measures carried out since June 2023, sufficient monetary easing has been effected in order to stabilise inflation over the medium term. Hence, the Monetary Policy Board underscored the need for a swift and full pass-through of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalisation of market interest rates in the period ahead.

Headline inflation continues to remain low, reflecting subdued demand conditions. Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), was recorded at 1.5 per cent in October 2023 compared to 1.3 per cent in September 2023. Food inflation continued to be negative (year-on-year) for the fourth consecutive month in October 2023. The National Consumer Price Index (NCPI, 2021=100) based headline inflation (year-on-year) was recorded at 1.0 per cent in October 2023, compared to 0.8 per cent in September 2023. Both CCPI and NCPI based core inflation (year-on-year), which reflects underlying demand pressures in the economy, moderated further in October 2023, reflecting the subdued demand pressures in the economy.

A one-off upward movement in inflation is expected in the near term. The spillover effects of tax measures and other developments are likely to be muted due to subdued underlying demand pressures; hence, this rise in inflation is expected to be transitory. Accordingly, headline inflation over the medium term is expected to converge towards the targeted level of 5 per cent, supported by appropriate policy measures

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