Monetary Policy Review: No. 02 – March 2023
At its meeting on March 3, 2023, the Monetary Board of the Central Bank of Sri Lanka (CBSL) decided to increase the SDFR and SLFR of the Central Bank by 100 basis points each to 15.50 percent and 16.50 percent, respectively, with effect as of the close of business on March 3, 2023.
In the midst of extraordinarily high inflation, a high level of uncertainty surrounding inflation projections, and the near term outlook, the staff of the International Monetary Fund (IMF) and the CBSL have been continuously engaged in intensive negotiations on the monetary policy stance. On the outlook for inflation, there have been some differences between the CBSL and IMF staff.
The Monetary Board and the IMF staff came to an agreement to raise the policy interest rates, but by a smaller amount than the adjustment that was anticipated during the initial stage of negotiations, in order to move forward with the finalisation of the IMF Extended Fund Facility (EFF) arrangement.
This choice demonstrates Sri Lanka’s dedication to the IMF-EFF agreement, which the government has pursued in an effort to guarantee economic stability on a number of fronts.
All parties stand to gain from the IMF-EFF agreement’s completion, which will also boost confidence and aid in long-term economic stability restoration.
More foreign exchange flows will be encouraged as a result, which will help the economy get out of the current economic crisis. The Board strongly believes that today’s decision would allow for a faster-than-expected deceleration of inflation because it believes that the economy has already persevered through the most trying and unprecedented times.
The Monetary Board believes that by altering monetary policy, the spread between policy interest rates and high market interest rates will be reduced. With the expected decline in market interest rates, particularly the yields on government securities, and the easing of risk premia as the debt restructuring process moves forward, this spread is anticipated to be further narrowed. The Board exhorts all stakeholders to maintain optimism and affirms its commitment to ensuring price, economic, and financial system stability. By doing so, it ensures that the interest rate structure will normalise as soon as the price pressures in the coming period are sufficiently contained.