The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 04 April 2023, 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 15.50 per cent and 16.50 per cent, respectively.
Having considered the recent and expected economic developments, and macroeconomic projections on domestic and global fronts, the Board viewed that the maintenance of the prevailing tight monetary policy stance is necessary to ensure that monetary conditions remain sufficiently tight to facilitate the continuation of the ongoing disinflation process amidst the improvements in market sentiments following the finalisation of the Extended Fund Facility (EFF) from the International Monetary Fund (IMF) and the downward shift in elevated market interest rates reflecting the falling risk premia.
Inflation is projected to follow a faster disinflation path, thereby further anchoring inflation expectations Headline inflation (year-on-year) based on the Colombo Consumer Price Index (CCPI) continued to decelerate for the sixth consecutive month in March 2023. Despite a sizeable impact from the recent hike in electricity tariffs and envisaged second round effects of previous hikes, headline inflation moderated in March 2023, mainly reflecting a larger-than-expected reduction in food inflation. Meanwhile, core inflation also decelerated for the sixth consecutive month in March 2023, reflecting the continued moderation in underlying demand pressures in the economy.
A faster deceleration of inflation is expected from April 2023 with the reduction in domestic prices of essentials following the greater passthrough of the moderation of global commodity prices and the recent appreciation of the Sri Lanka rupee, and the large disinflationary impact arising from the base effect. The subdued aggregate demand on account of tight monetary and fiscal policies and improved domestic supply conditions will ensure the envisaged disinflation process in the period ahead, supported also by anchoring inflation expectations.
Accordingly, headline inflation is projected to reach single digit levels by end 2023 and stabilise at desired levels thereafter over the medium term.
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