The Monetary Board has decided to increase the key policy interest rates of the Central Bank, namely the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 25 basis points each.
SDFR and SLFR will be increased to 7.25 per cent and 8.75 per cent, respectively, with effect from 24 March 2017.
According to a statement made by the Central bank of Sri Lanka stated that, as per the provisional estimates of the Department of Census and Statistics (DCS), the Sri Lankan economy grew by 4.4 per cent in real terms during 2016 compared to the growth of 4.8 per cent in 2015.
In spite of challenging external factors such as adverse weather conditions and global developments, an acceleration of growth was observed towards end 2016 with the last quarter of 2016 recording a growth of 5.3 per cent, partly supported by the base effect. Year-on-year core inflation based on both CCPI and NCPI also remained high at 7.1 per cent in February 2017.
The recent acceleration in inflation is largely due to the impact of prevailing drought conditions and adjustments to the tax structure, and it is projected that inflation would revert to the desired mid single digit levels in the period ahead and stablise thereafter, unless disrupted by adverse inflation expectations.
The Economic research department stated that earnings from tourism and workers’ remittances continued to cushion the adverse impact of the trade deficit on the BOP.
Furthermore, outflows of foreign investments from the government securities market observed in early 2017 appear to have subsided, and marginal inflows have been experienced in spite of the increase in policy interest rates in the United States.
Considering the above developments, the Monetary Board, at its meeting held on 23 March 2017, was of the view that further tightening of monetary policy is necessary as a precautionary measure, in order to contain the build-up of adverse inflation expectations and the possible acceleration of demand side inflationary pressures through excessive monetary and credit expansion.
The Board was of the view that these improvements, together with the substantial upward movements already observed in market interest rates, have reduced the required adjustment in policy interest rates.