The Monetary Board of the Central Bank on Wednesday (23) 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 11.00 per cent and 12.00 per cent, respectively.
It said in a statement: The Board arrived at this decision following a careful analysis of current and expected developments in the domestic as well as the global economy, while noting the significant easing of monetary conditions effected since June 2023.
The Monetary Board took note of the downward adjustment of market interest rates in response to monetary policy easing measures implemented thus far and the need to allow space for further adjustment of market interest rates swiftly. However, the Board observed that market interest rates of certain lending products remain excessive and are not in line with the current monetary policy stance.
Moreover, the Board anticipates a faster reduction in overall market lending interest rates in line with the recent monetary policy easing measures. Accordingly, the Board decided to adopt targeted administrative measures to reduce specific lending interest rates that it considered to be excessive and direct the licensed banks to reduce overall rupee lending interest rates by an appropriate margin in the period ahead.
Headline inflation, measured by the year-on-year change in the Colombo Consumer Price Index (CCPI, 2021=100), decelerated to 6.3 per cent in July 2023, reaching single digit levels for the first time since November 2021. Following a similar trend, headline inflation, based on the National Consumer Price Index (NCPI, 2021=100), also decelerated to 4.6 per cent in July 2023 (year-on-year).
The moderation in headline inflation was mainly driven by the softening of energy and food inflation, along with the favourable statistical base effect. Meanwhile, CCPI and NCPI based core inflation, which reflects underlying demand pressures in the economy, moderated to 6.1 per cent and 6.3 per cent, respectively, in July 2023 (year-on-year). Headline inflation is expected to moderate further over the next few months and stabilise around mid-single digit levels over the medium term.
Domestic economic activity is expected to recover in the second half of 2023 and gradually reach the potential level of economic growth over the medium term Economic activity is projected to recover gradually during the second half of 2023 and reach its potential level thereafter, supported by the normalisation of monetary conditions, improvements in business confidence, enhancements in supply conditions and the relaxation of import restrictions, and the impact of growth promoting structural reforms.
Leading indicators of economic activity point to a lower contraction in GDP in the second quarter of 2023, compared to the previous projections, while the second half of 2023 is expected to record a positive growth, compared to the same period in 2022. However, the impact of weather related disruptions and modest external demand conditions could weigh on expected growth in the near term. The external sector remains resilient, allowing a gradual relaxation of balance of payments restrictions.
The trade deficit decreased notablyduring the seven months ending July2023 with a significant decrease in mer-chandise imports, despite the decrease inmerchandise exports. Earnings fromtourism and workers’ remittances, whichimproved considerably from January toJuly 2023, in comparison to the corre-sponding period in the previous year, areexpected to improve further in the periodahead. Despite some recent outflows fromthe government securities market, netforeign investment inflows remained pos-itive during the seven months endingJuly 2023. In view of the improvementsin the balance of payments conditionsand the need to support the recovery ofactivity, the Government relaxed importrestrictions related to 638 HS codes,including those of commercial vehicles,since June 2023. Although a significantshare of import restrictions has alreadybeen relaxed, demand for imports contin-ued to remain subdued, reflecting thetight financial conditions