Interest rates left unchanged by Central Bank, after latest policy review

The Central Bank (CB), after its Monetary Board met on Thursday, decided to continue with the current interest rate regime, with the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank remaining at the current levels of 7 per cent and 8 per cent, respectively.

“The Board arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as the global economy,” the CB said in a media statement on Friday. Thursday’s board meet is probably the last one for outgoing CB Governor Dr. Indrajit Coomarswamy who has signaled his intention to step down in mid-December.

The CB said the decision of the Board is consistent with the aim of maintaining inflation in the desired 4-6 per cent range while supporting economic growth to reach its potential over the medium term.

It said a gradual revival in domestic economic activity is expected over the medium term. Economic growth is predicted to be modest during the remainder of the year, with likely subpar growth in industry and services activities as implied by leading indicators. However, improved investor confidence, supported by political stability and fiscal stimulus driven boost to aggregate demand, is expected to drive short term growth. The introduction of an appropriate policy mix, which utilises the available limited policy space prudently, would support the economy to reach as well as enhance its potential over the medium term, it said.

The CB said the external sector performance was buoyed by the cumulative contraction of the trade deficit over the first nine months of 2019, largely driven by the decline in import expenditure. The Sri Lankan rupee displayed increased volatility, following a notable appreciation against the US dollar in the immediate aftermath of the Presidential election. 

Headline inflation, as measured by the year-on-year changes in Colombo Consumer Price Index (CCPI) as well as National Consumer Price Index (NCPI), accelerated recently due to increased food prices driven by domestic supply disruptions. “These transitory supply side disruptions are expected to cause continued volatility in inflation in the near term together with tax revisions and possible revisions to administratively determined prices,” the CB said.

“While noting the fiscal slippages (drop in tax revenue) thus far during the year, the Monetary Board observed that the recent tax revisions (announced on Tuesday) would support lower inflation and higher economic growth in the short term, but was of the view that greater clarity with regard to the medium term fiscal path of the government is required to assess the impact on the economy over the medium term,” it said.