The Monetary Board of the Central Bank of Sri Lanka, at its meeting held Wednesday, 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, thereby continuing the prevailing accommodative monetary policy stance.
The Board noted the decline in overall market lending rates, following the unprecedented monetary easing measures taken by the Central Bank thus far during the year, and expects the broad based downward adjustment in market lending rates to continue, thereby ensuring affordable credit flows to productive sectors of the economy in the prevailing low inflation environment.
Global monetary policy continues to remain accommodative as global growth prospects remain bleak with the resurgence of COVID-19 in many parts of the world. The global economy, as per the World Economic Outlook (WEO) of the International Monetary Fund (IMF) released in October 2020, is projected to contract by 4.4 per cent in 2020. The outlook for growth in 2020 is less severe than the IMF’s previous forecast, supported by large scale policy stimuli implemented worldwide.
However, the recent surge in COVID-19 cases globally has prompted several countries to reimpose lockdowns, which may dampen global growth prospects
Against this background, most central banks across the globe are expected to continue their accommodative monetary policy stance in the foreseeable future. The Sri Lankan economy is expected to move along a faster recovery path, despite the latest surge in COVID-19 cases locally that could hamper near term growth prospects. The release of GDP estimates for the second quarter of 2020 by the Department of Census and Statistics (DCS) has been delayed.
It is likely that the second quarter of 2020 has recorded a greater contraction than in the first quarter, followed by a recovery in the third quarter of the year.
However, as per the DCS, the unemployment rate, which was estimated at 5.7 per cent in the first quarter of 2020, has declined to 5.4 per cent in the second quarter.
The level of employment has also remained broadly unchanged in the second quarter compared to the large decline reported for the first quarterWorkers’ remittances continued to record a notable acceleration since June 2020. In the meantime, Sri Lanka successfully settled the International Sovereign Bond (ISB) of US dollars 1 billion matured in early October 2020, continuing the unblemished record on debt servicing. The exchange rate remained stable and the depreciation of the Sri Lankan rupee against the US dollar is limited to 1.5 per cent thus far during the year.
In this background, the Central Bank continued to purchase a sizable volume of foreign exchange from the domestic market. Gross official reserves were estimated at US dollars 6.7 billion at end September 2020, which provided an import cover of 4.6 months.
Inflation is expected to remain within the desired range Headline inflation, based on the Colombo Consumer Price Index (CCPI), decelerated in September 2020, on a year-on-year basis, while there was some acceleration in the National Consumer Price Index (NCPI) based headline inflation due to the rise in food prices.
