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Central Bank stays pat on rates
Wants more time for previous cuts to do their work
- Decides to keep the current Standing Lending Facility Rate (SLFR) and the Standing Deposit Facility Rate (SDFR) unchanged at 9.50 percent and 8.50 percent
- Mandatory reserve ratio for banks was also left at 2.00 percent
- Says the Board observed the need for a further reduction in market lending rates
As widely expected, the Central Bank left its key policy rates unchanged at the policy meeting held this week.
This was largely to provide the previous rate cuts to do their work in bringing down the rest of the market lending rates further as inflation expectations remain well anchored.
At the third monetary policy board meeting held on Monday, the Central Bank decided to keep the current Standing Lending Facility Rate (SLFR) and the Standing Deposit Facility Rate (SDFR) unchanged at 9.50 percent and 8.50 percent respectively.
The mandatory reserve ratio for banks was also left at 2.00 percent.
“While the medium term inflation outlook remains compatible with the current level of policy interest rates and inflation expectations are well anchored, the Board observed the need for a further reduction in market lending interest rates in line with policy interest rates and other benchmark interest rates, which are imperative for the easing of domestic monetary conditions and domestic economic recovery,” the statement issued to announce the monetary policy action said.
After staying the rates, Central Bank Governor Dr. Nandalal Weerasinghe said the Board would like to give more time for market lending rates to adjust to its previous policy actions.
There are long and variable lags between the monetary policy action and their impact on the financial markets and
the real economy.
Therefore, he said it is natural for the lending rates, which have already come down substantially, to further respond to more recent policy rate cuts.
The Central Bank in March cut its key policy rate by 50 basis points as inflation remained well below expectations and also to spur economic activities which were crushed by their own follies.
It is increasingly becoming evident that the inflationary spiral back in 2022 and part of 2023 was misread, and reacted by making the monetary policy bone crushingly tight.
That pushed swaths of businesses and people out of business and jobs, tipped scores of people into dire
poverty and hunger.
What exacerbated economic hardships were the standard International Monetary Fund prescription which raised taxes to sky high levels, slapped new taxes and tied energy and utilities prices to market prices.
And all these policies crushed demand and prolonged an otherwise short term economic dip. Perhaps understanding the folly, the Central Bank changed track and pivoted to cut policy rates from June last year.
Since June, the Central Bank has delivered 700 basis point cut in key policy rates, effectively unwinding the jaw dropping 700 basis point hike back in April 2022.
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