ECONOMYNEXT – Sri Lanka cuts policy rates 250 basis points lowering the rate at which liquidity is injected to markets to 14.0 percent to from 16.50 percent, saying inflation was falling faster than expected.
“The Board arrived at this decision with a view to easing monetary conditions in line with the faster than expected slowing of inflation, gradual dissipation of inflationary pressures and further anchoring of inflation expectations,” the central bank said in its May policy statement.
“The commencing of such monetary easing is expected to provide an impetus for the economy to rebound from the historic contraction of activity witnessed in 2022, while easing pressures in the financial markets.”
“Headline inflation (year-on-year), based on the Colombo Consumer Price Index (CCPI), continued the deceleration path, faster-than-projected earlier, supported by the lagged impact of tight monetary and fiscal policies, strengthening of the Sri Lanka rupee, reduction in fuel and gas prices, normalisation of food prices and the favourable impact of the statistical base effect.
“The full passthrough of the large appreciation of the exchange rate observed recently is yet to be
reflected in the price levels, and it would quicken the disinflation process, as the prices of
imported goods are expected to decline further in the period ahead.”
Sri Lanka’s balance of payments has been surplus for several months and the central bank has allowed the rupee to appreciate. When the BOP is in surplus and as long as the central bank can buy dollars and generate liquidity rates tend to fall.
Market rates however has been high amid expectations of a domestic debt re-structuring and mainly government borrowings, with private credit negative and state enterprises also cutting losses.
“With greater macroeconomic stability being achieved through corrective policy measures, particularly in terms of faster-than-expected deceleration of inflation thus far during 2023 and the benign inflation outlook and the easing of the BOP pressures, the Monetary Board of the Central Bank of Sri Lanka, upon carefully assessing the current and expected developments, decided to relax the stance of monetary policy and reduce the policy interest rates.”