CBSL maintains policy rates; near term supply side developments do not warrant policy tightening

The Monetary Board has 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 5.00 percent and 6.00 percent, respectively.

The Board said it arrived at this decision after considering the macroeconomic conditions and expected developments on the domestic and global fronts.

The Board reiterated its commitment to maintaining inflation at the targeted levels over the medium term with appropriate measures, while supporting the economy to reach its potential in the period ahead.

Inflation accelerated in recent months due to high food inflation and some acceleration in non-food inflation.

“Along with resultant upward adjustments in other market prices, this is likely to cause headline inflation to deviate somewhat from the targeted levels in the near term,” the Central Bank said.

“While such supply side developments in the near term do not warrant monetary policy tightening, measures already taken by the Central Bank in relation to interest rates and market liquidity would help stabilise demand pressures over the medium term.”

As per the estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy witnessed a strong recovery during the second quarter of 2021, recording a real growth of 12.3 percent, year-on-year, following the growth of 4.3 percent, year-on-year, in the first quarter of 2021.

Available indicators and projections suggest that the real economy would grow by around 5 percent in 2021, and gradually traverse to a high and sustained growth trajectory over the medium term.

In response to the tightening of monetary policy in August 2021, most market deposit and lending rates have adjusted upwards. Further, yields on government securities witnessed a sharp upward adjustment with the removal of maximum yield rates for acceptance at primary auctions.

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