The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 05 July 2023, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 200 basis points (bps) to 11.00 per cent and 12.00 per cent,respectively. The Board arrived at this decision following a careful analysis of the current and expected developments, including the faster-than-envisaged disinflation process and benign inflation expectations in the domestic economy, with the aim of enabling the economy to reach its potential and stabilising inflation at mid-single digit levels in the medium term, while easing pressures in the financial markets. The Board expects that, with this reduction of policy interest rates by 200 bps, and the reduction of policy interest rates by 250 bps in early June 2023, along with the significant reduction of risk premia on government securities witnessed recently, the market interest rates, particularly lending rates, will adjust downwards adequately and swiftly. Therefore, the banking and financial sector is urged to pass on the benefits of this significant easing of monetary policy by the Central Bank to individuals and businesses, thereby supporting economic activity to rebound in the period ahead.

The disinflation process continues, firming inflation expectations that would help stabilise inflation at mid-single digit levels in the medium term Colombo Consumer Price Index (CCPI) (2021=100) based headline inflation (year-on-year) decelerated further in June 2023 to 12.0 per cent, reflecting easing price pressures across many categories, including energy and food prices, along with the favourable base effect. CCPI based food inflation (year-on-year) and core inflation (year-on-year), which reflects underlying inflation, moderated to single digit levels in June 2023, reinforcing the disinflation process. The full passthrough of the appreciation of the Sri Lanka rupee against the US dollar thus far in 2023 is yet to be reflected in the price levels, a factor that could further support the disinflation process.

As per the latest projections of the Central Bank, headline inflation is expected to decelerate further and reach single digit levels by early Q3-2023 and stabilise around mid-single digit levels

over the medium term. The ongoing disinflation process is supported by the lagged impact of tight monetary and fiscal policies, the expected softening of energy and food prices and their spillover effects, and possible repricing of goods and services due to exchange rate appreciation,

alongside the favourable impact of the statistical base effect. Moreover, the firming of inflation

expectations provides space for the easing of the monetary policy stance.

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