Monday Dec 23, 2024
Monday Dec 23, 2024
Wednesday, 24 January 2024 00:40 - - {{hitsCtrl.values.hits}}
In its first monetary policy meeting for 2024, the Central Bank has opted to keep its policy rates stable, citing the necessity of reducing inflation while simultaneously lowering interest rates.
The Monetary Board which met on Monday, decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) unchanged at 9% and 10%, respectively.
The Monetary Board’s decision follows a thorough evaluation of both domestic and international macroeconomic developments to maintain inflation at the targeted level of 5% over the medium term. Despite potential inflationary pressures from recent tax changes and supply-side factors, the Board believes these will not significantly alter the medium-term inflation outlook.
“Maintaining the current policy rates provides room for banks to further reduce the interest rates for borrowers and enhance economic recovery,” Central Bank Governor Dr. Nandalal Weerasinghe said at the post-Monetary Policy Review meeting media briefing yesterday.
Noting the credit expansion over the past few months, he expressed optimism that lowering interest rates will further expedite economic recovery.
Addressing concerns about a potential spike in inflation due to the new Value Added Tax (VAT) regime and adverse weather, he said the Central Bank anticipates a temporary uptick in January and February, reaching about 6% before gradually decreasing to the targeted 5% in the medium term.
Dr. Weerasinghe also attributed positive economic growth in the third quarter of 2023 to the eased Monetary Policy stance, highlighting increased credit growth, positive GDP growth and a stable exchange rate.
The economy recorded an expansion in the third quarter of 2023, following six consecutive quarters of economic contraction. Accordingly, the economy is estimated to have grown by 1.6%, year-on-year (YoY), in the third quarter of 2023, as per the GDP estimates published by the Department of Census and Statistics (DCS). This was a broad-based expansion in economic activity supported by expansions recorded in Agriculture, Industry and Services sectors, on a YoY basis.
The rebound in domestic economic activity is expected to be sustained, supported by the faster pass-through of relaxed monetary policy to broader market interest rates and the resultant firming of credit demand, improvements in business and investor sentiments, improvements in supply conditions and the gradual rebound expected in external demand conditions. It added that the external sector is expected to remain resilient in the period ahead.
The CBSL also said the external sector is expected to remain resilient in the period ahead. It said the merchandise trade deficit is estimated to have moderated during 2023 in comparison to 2022. This, coupled with the notable recovery in trade in services, mainly earnings from tourism, and the strong momentum of workers’ remittances, is expected to have resulted in a surplus in the current account balance of the balance of payments for 2023. Gross official reserves (GOR) improved notably to $ 4.4 billion by end December 2023, which include the swap facility from the People’s Bank of China (PBOC). This strong rebound of GOR was supported by the notable net purchases by the Central Bank from the domestic forex market and the proceeds from multilateral agencies. The Sri Lanka rupee, which appreciated by around 12% against the US dollar in 2023, continued to show an appreciation so far in 2024.
