CBSL maintains Monetary Policy stance | Daily News

CBSL maintains Monetary Policy stance

The Monetary Board of the Central Bank of Sri Lanka decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at the current levels of 13.50% and 14.50%, respectively.

The Board is of the view that although inflation is projected to remain elevated in the near term, the substantial policy measures taken by the Board, at its meeting held on 08 April 2022, combined with the other measures to stem the firming up of aggregated demand pressures, are expected to contain any further build-up of inflation expectations and ease inflationary pressures in the period ahead.

A faster pass through to market interest rates is observed following the significant monetary policy tightening measures Market interest rates have notably adjusted upwards reflecting the significant monetary policy tightening measures taken by the Central Bank in April 2022.

The interest rates on deposit and lending products of financial institutions have adjusted upwards considerably, correcting some anomalies that prevailed in the market interest rate structure. Although domestic credit in rupee terms recorded a significant expansion in March 2022, mainly due to the valuation impact of foreign currency denominated loans, the parity adjusted domestic credit expansion is estimated to have slowed. Meanwhile, the resultant expansion of broad money growth has been weighed down by the contraction in net foreign assets (NFA) of the banking system.

It is envisaged that the elevated interest rate structure would attract more deposits into the banking system. However, the expansion of domestic credit, particularly to the private sector, would remain restrained due to the pass through of the significantly tight monetary policy measures. Meanwhile, yields on government securities, which increased considerably in the recent past, are expected to moderate and stabilise at lower

levels in the period ahead with the necessary fiscal adjustments together with renewed efforts to restore political stability in the country.

Inflation is projected to remain elevated in the coming months before moderating thereafter, supported by the realisation of the full impact of the policy measures Headline inflation is projected to remain escalated in the near term on account of domestic supply shortages, increased global commodity prices, the effects of the large depreciation of the Sri Lanka rupee against the US dollar thus far during the year, along with the impact of aggregate demand pressures.

However, inflation is expected to moderate thereafter reflecting the impact of corrective policy measures of the Central Bank and the expected improvements in both domestic and global supply conditions. Moreover, it is envisaged that the recent tightening of monetary conditions and the strengthening of monetary policy communication will help anchor inflation expectations of the public in the period ahead.

The external sector continues to face heightened challenges, which are being addressed by an array of measures The guidance provided by the Central Bank to all licensed banks in the determination of the interbank spot exchange rate, since mid-May 2022, is expected to minimise any excessive volatility in the domestic foreign exchange market. This, coupled with the recent tightening of the monetary policy stance, restrictions on imports on open account terms, and the reduction in the proportion of mandatory foreign exchange sales by the banks to the Central Bank, is expected to ease pressures on the Sri Lanka rupee, while also gradually improving liquidity in the domestic foreign exchange market. Moreover, these measures are anticipated to help mobilise foreign exchange to finance essential imports, until sizeable bridging finance is made available. Some recovery in foreign exchange inflows in terms of workers’ remittances is expected due to the notable reduction in the gap between the official exchange rate and the rate offered by the grey market and the continued increase in migration of workers. However, the near term outlook of the tourism sector is likely to remain unfavourable due to both global and domestic factors.

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