The Monetary Board of the Central Bank has decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points to 14.50 percent and 15.50 percent, respectively.
Having noted the higher-than-expected escalation of headline inflation recently and the increased persistence of high inflation in the period ahead, the Board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations.
In arriving at this decision, the Board has weighed the impact of tighter monetary conditions on overall economic activity, including the micro, small, and medium scale businesses, and the financial sector performance, among others, against far-reaching adverse consequences of any escalation of price pressures across all sectors of the economy in the near term.
On balance, the Board was of the view that this policy adjustment would help guide inflation expectations to be anchored around the targeted level of headline inflation over the medium term, while curtailing any build-up of underlying demand pressures in the economy.
The Board, however, reiterates that the remedial policy measures adopted by the Central Bank need to be complemented by timely and appropriate policy adjustments by the Government, including the need for the expeditious implementation of fiscal consolidation measures, alongside efficient and effective social welfare programmes to support the vulnerable groups of the society.
“The growth of credit to the private sector, once adjusted for the impact of the depreciation of the Sri Lanka rupee against the US dollar, recorded signs of slowing in May 2022, year-on-year, while the expansion of broad money has been weighed down by the contraction in net foreign assets of the banking system,” the Central Bank said.
“The elevated lending interest rates are expected to slow the expansion of money and credit aggregates in the period ahead, while the high deposit interest rates are expected to draw a significant amount of money in circulation into the banking system.”