The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 22 January 2024, 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 9.00 per cent and 10.00 per cent, respectively.
The Board arrived at this decision following a comprehensive assessment of domestic and international macroeconomic developments in order to maintain inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach its potential. The Board took note of the effects of the recent developments in taxation and supply-side factors that are likely to pose upside pressures on inflation in the near term.
However, the Board viewed that the impact of these developments would not materially change the medium-term inflation outlook. Further, the Board noted the space created by past monetary policy easing measures and the decline in the risk premia attached to government securities for further downward adjustment in market lending interest rates.
The Board underscored that the envisaged benefit of further reduction in market lending interest rates needs to be adequately and swiftly passed on to the businesses and individuals by financial institutions.
A further decline in market lending interest rates is expected in the period ahead
Market interest rates continued to adjust downwards in line with eased monetary policy and administrative measures taken to reduce overall market lending interest rates. Moreover, yields on government securities continue to decline supported by falling risk premia. The Monetary Policy Board of the Central Bank of Sri Lanka is of the view that there is further space for market interest rates, especially the lending interest rates and yields on government securities to decline in the period ahead, in line with the reduction in policy interest rates effected in the recent past.
Meanwhile, reflecting the transmission of the relaxed monetary policy stance, outstanding credit to the private sector by the banking sector continued to expand notably on a month-on-month basis in November as well as December 2023. The expansion in credit to the private sector is expected to be sustained in the period ahead, supported by the further easing of monetary conditions.
