The Monetary Board of the Central Bank of Sri Lanka (CBSL) has decided to reduce the bank’s standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) by 200 basis points to 11.00 per cent and 12.00 per cent, respectively.
The Board arrived at this decision, at its meeting held on July 05, following a careful analysis of the current and expected developments.
They included the faster-than-envisaged disinflation process and benign inflation expectations in the domestic economy, with the aim of enabling the economy to reach its potential and stabilising inflation at mid-single digit levels in the medium term, while easing pressures in the financial markets, the CBSL said in a statement.
The Board expects that, with this reduction of policy interest rates by 200 bps, and the reduction of policy interest rates by 250 bps in early June 2023, along with the significant reduction of risk premia on government securities witnessed recently, the market interest rates, particularly lending rates, will adjust downwards adequately and swiftly.
“Therefore, the banking and financial sector is urged to pass on the benefits of this significant easing of monetary policy by the Central Bank to individuals and businesses, thereby supporting economic activity to rebound in the period ahead,” the statement said.
Official reserves estimated at USD 3.5 billion
Meanwhile, Sri Lanka’s gross official reserves is estimated at around US dollars 3.5 billion as at end of June 2023, including the swap facility from the People’s Bank of China, according to the CBSL.
In its latest monetary policy review, the bank noted that the trade deficit decreased notably during the five months ending May 2023 with a significant decrease in merchandise imports, despite some setback in merchandise exports, reflecting the moderation of global demand.
The liquidity conditions in the domestic foreign exchange market continued to improve in recent months supported by increased forex inflows, it said.
Earnings from tourism as well as workers’ remittances are expected to have increased substantially during the first half of 2023, compared to the corresponding period of 2022 and this momentum is expected to continue going forward, the CBSL said.
A notable increase in net foreign investment inflows was recorded in the government securities market.
The government received funds from multilateral agencies for budget support and further inflows are expected during the remainder of the year.
With improved forex flows and market sentiments, the Sri Lanka rupee appreciated by around 19 per cent against the US dollar thus far during the year.
The bank said it was able to accumulate a sizeable amount of foreign exchange from the domestic foreign exchange market.
Accordingly, the level of gross official reserves is estimated at around US dollars 3.5 billion as at end June 2023, including the swap facility from the People’s Bank of China, the CBSL said.
