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Sri Lanka maintains policy rates, current monetary policy stance is appropriate

Central Bank releasing the monetary policy review on Thursday said it has decided to maintain current policy interest rates as the current monetary policy stance is appropriate.

Accordingly, the Monetary Board has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.25 percent and 8.75 percent, respectively while the Statutory Reserve Ratio remains at 7.50 percent.

Releasing the policy stance, the Central Bank said the economy is expected to record a modest recovery in the forthcoming quarters following the low growth witnessed in the first quarter of 2017.

“The recovery of the agriculture related activities and the positive performance of the industry and services related activities together with the reinstatement of GSP+ facility are expected to contribute to economic growth,” the Central Bank said.

Both Colombo inflation and national inflation moderated at a faster pace in the recent months, despite the supply side disruptions encountered in May 2017 due to the floods.

However, monetary expansion continued to remain high in May as well as in June 2017. While monetary growth was mainly driven by the expansion in domestic credit, net foreign assets (NFA) of the banking system also positively contributed to this expansion, the Bank said.

In the external sector, export performance continued to improve in May 2017 led by agricultural exports but the import expenditure also increased widening the cumulative trade deficit.

Tourist arrivals and earnings from tourism improved in June 2017, albeit at a slower pace, while workers remittances continued to slow during the first half of 2017 on account of prevailing economic and geopolitical uncertainties in the Middle East.

However, the capital market, both government securities and the Colombo Stock Exchange (CSE), witnessed a noticeable influx of foreign funds (on a net basis) from March 2017. Sri Lanka also received the third tranche of the IMF-Extended Fund Facility (EFF) amounting to US dollars 167.2 million.

“Renewed investor confidence and anticipated direct investment inflows are expected to further strengthen the external sector outlook,” the Bank said.

Sri Lanka’s gross official reserves stood at US dollars 6.7 billion as at end July 2017, while, the rupee depreciated against the US dollar by 2.6 per cent by end July 2017.

Accordingly, the Monetary Board has decided to maintain the current monetary policy stance as it is appropriate.

 

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