CBSL expects moderation of excessive market interest rates | Daily News

CBSL expects moderation of excessive market interest rates

Supported by favorable supply side developments and tight monetary policy measures, headline inflation pivoted towards the envisaged disinflation path in October 2022, after passing the peak in September 2022. The deceleration in inflation is expected to continue.

The Central Bank expects moderation of excessive market interest rates in line with the prevailing policy interest rates and improvements taking place in overall money market liquidity conditions.

In addition, the anomaly in the market interest rates is expected to be rectified benefiting from improving money market liquidity conditions and anchoring of inflation expectation in line with the envisaged disinflation path.

The Central Bank Governor Dr. Nandalal Weerasinghe speaking at the Monetary Policy Press briefing held at the CBSL yesterday said CBSL expects to bridge the gap between market interest rates and the policy interest rates going forward .

As per the CBSL observations, the market rates have seen upward trends and the premiums between the policy rates and market rates have been widening. And as per the CBSL expectations, inflation too will come down going forward. Commenting on the market liquidity situation, the Governor said both the forex market and rupee market liquidly are showing improvements.

“As a result, inflation expectations are anchored. Once we clear the debt restructuring treatment, I’m optimistic that excessive premiums between market interest rates and policy interest rates will be stabilized going forward. With that, we expect without our intervention in terms of bringing policy rates down ;we expect market rates to adjust towards the proper normalization path.”

With the liquidity situation easing , CBSL hopes that banks will not be offering competitive rates to attract deposits. If an appropriate downward adjustment in the market interest rates would not take place in line with the envisaged disinflation path , the central bank will also consider imposing administrative measures to prevent any undue movement in the market interest rates The Central Bank expects that inflation will continue to decelerate due to subdued aggregate demand pressures , expected improvements in domestic supply conditions , and the favourable statistical base effect.

Risks to the inflation outlook in the near term are tilted to the downside thereby supporting the disinflation path and stabilizing inflation at the desired levels towards the end of 2023. Domestic economic activity is also expected to remain tepid during 2022; however a gradual and sustained recovery is expected from 2023.

The Monetary Board of the Central Bank of Sri Lanka 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 14.50 % and 15.50 %, respectively, after considering the recent and expected developments in the domestic and global economy and macroeconomic projections. The Board noted that the maintenance of a tight monetary policy stance is necessary to contain any demand driven inflationary pressures in the economy, while helping to further strengthen disinflation expectations, thus enabling to steer headline inflation towards the targeted level of 4-6 % over the medium term.


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