Interest rates unchanged after Sri Lanka’s monetary policy review

Interest rates were left unchanged on Thursday after the monthly review of monetary policy by the Monetary Board of the Central Bank (CB).

At its meeting on March 3, the board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 4.50 per cent and 5.50 per cent, respectively.

“The board arrived at this decision after carefully considering the macroeconomic conditions and expected developments on the domestic and global fronts. The board noted the recent slowdown in credit disbursements to the private sector and inadequate lending to productive sectors of the economy, and stressed the need for the financial system to actively lend to productive sectors in order to support the ongoing recovery of domestic production-based economic activity,” the CB said in a media release.

Further, the board observed the recent uptick in certain market interest rates, and re-emphasised its commitment to continue the low interest rate structure until the economy shows signs of sustained revival, in the context of the low inflation environment.

“Given the low inflation environment, the Central Bank is in the process of actively supporting the Government’s economic agenda focused on developing a production-based economy. Positive sentiments fuelled by the COVID-19 vaccination drive in the country and the impact of growth-promoting policies are expected to support the economic revival over the short to medium term,” the statement said.

The trade deficit contracted by US$2 billion in 2020 benefiting from the notable decline in expenditure on imports, which more than compensated the decline in earnings from exports. The trade deficit is expected to remain compressed in 2021, supported by appropriate measures taken by the Government. Workers’ remittances continued to increase steadily from mid-2020, recording an annual increase of 5.8 per cent, and a further growth of 16.3 per cent in January 2021, from a year earlier. The tourism sector is expected to gradually recover in 2021 along with the rollout of vaccinations locally and globally. The exchange rate has recorded intermittent volatility, and the Central Bank has taken steps to dampen excessive speculation causing such volatility in the foreign exchange market.

It said both headline and core inflation based on consumer price indices remain low, reflecting the subdued aggregate demand conditions in the economy, in spite of volatile food prices. Inflation is projected to remain subdued during the remainder of the year supported by the envisaged improvements in domestic supply conditions, which would also contribute towards maintaining inflation in the targeted range of 4-6 per cent over the medium term.