By CentralBankNews.info
Sri Lanka’s central bank left its key policy rates unchanged, saying the recent rise in taxes and supply-side disruptions from adverse weather could exert some upward pressure on inflation in the immediate future but inflation is still expected to remain in mid-single digit levels as they are supported by appropriate policies.
The Central Bank of Sri Lanka last raised its key rates, the Standing Deposit Facility Rate (SDRF) and the Standing Lending Facility Rate (SLFR), by 50 basis points in February to 6.50 percent and 8.0 percent, respectively.
Sri Lanka’s headline inflation rate rose to 3.1 percent in April from 2.0 percent in March while core inflation was unchanged at 4.5 percent.
This month Sri Lanka’s government raised the Value Added Tax (VAT) rate to 15 percent from 11 percent and removed certain exemptions to raise revenue amidst a rising budget deficit.
Last month the International Monetary Fund (IMF) agreed to provide $1.5 billion to Sri Lanka that is expected to result in other loans for total inflow of $2.2 billion. As part of the IMF conditions, the government is expected to reform its budget and improve the performance of state-run enterprises.
The aim is to narrow the fiscal deficit to 3.5 percent of Gross Domestic Product by 2020 from 7.4 percent in 2015, up from 5.7 percent in 2014 and above the government’s target of 4.4 percent.
The central bank said foreigners had showed renewed interest in government securities in the last month and together with the IMF’s Extended Fund Facility, along with structural reforms, this should enhance Sri Lanka’s resilience to external shocks and improve investor confidence.
Sri Lanka’s rupee has been depreciating steadily in recent years and was trading at 146.7 to the U.S. dollar today, down 1.8 percent this year and down 10.6 percent since the start of 2015.
The Central Bank of Sri Lanka issued the following statement:
Taking into consideration the developments discussed above, the Monetary Board, at its meeting held on 20 May 2016, was of the view that the current monetary policy stance of the Central Bank is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.50 per cent and 8.00 per cent, respectively. “
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