CBSL tightens monetary policy to curb inflationary pressures; rectify external sector imbalances

Sri Lanka’s Central Bank has tightened its monetary policy stance to address the imbalances in the external sector and to preempt the buildup of excessive inflationary pressures over the medium term.

Accordingly, the Monetary Board of the Central Bank has decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 basis points each, to 5.00 percent and 6.00 percent, respectively.

In addition, the Monetary Board decided to increase the Statutory Reserve Ratio (SRR) applicable on all rupee deposit liabilities of licensed commercial banks (LCBs) by 2.0 percentage points to 4.00 percent, with effect from the reserve maintenance period commencing on 01 September 2021.

The upward adjustments in market interest rates and the expected liquidity deficit in the domestic money market would also help the economy to absorb the large amount of currency held by the public observed since the onset of the pandemic in early 2020.

Inflation, which remained moderate during early 2021, accelerated somewhat in recent months due to high food inflation and some acceleration in non-food inflation.

“The envisaged improvements in aggregate demand conditions and the likely increases in global energy and other commodity prices may generate some inflationary pressures in 2022, requiring preemptive policy measures to ensure the maintenance of inflation in mid-single digit levels over the medium term,” the Central Bank said.

“The Central Bank will continue to monitor domestic and global macroeconomic and financial market developments and take appropriate measures to ensure that the economy reverts to its potential, while maintaining inflation in the targeted 4-6 percent range under its flexible inflation targeting framework.”

Meanwhile, credit to the private sector has recorded a 12.9 percent growth in June compared to 7.5 percent in March this year.