CBSL maintains easing stance amid stable inflation, lingering growth concerns

• Says would hold off on any more rate cuts until both Treasury yields and lending rates come down
• Says maintaining headline inflation at 5.0% level, with a plus or minus 2 percentage points
• Asserts CB would not hesitate to take proactive actions should domestic price stability be threatened
• Considers replacing current dual policy rates with a single policy interest rate mechanism

The Central Bank yesterday said it does not see the need to change the course of the current monetary policy path set off in June last year, as inflation remains well anchored, despite the near-term blips in the price indices, due to the recent hike in the Value Added Tax.
After cutting policy rates four times through November last year by a total of 650 basis points, the Central Bank said it would hold off on any more rate cuts until both the Treasury yields and lending rates come down to levels closer to the policy rates, which currently stand at 9.0 and 10.0 percent, as it sees more room for them to fall by their own, in response to the previous rate cuts.
Presenting the annual customary policy statement by the Central Bank after two years of absence, Governor Dr. Nandalal Weerasinghe said the institution is committed to maintaining headline inflation at 5.0 percent level, with a plus or minus two-percentage-point tolerance level agreed with the government.
However, he said they would not hesitate to take proactive actions should anything seems to threaten the domestic price stability – the primary mandate of the Central Bank and the bedrock of the economy.
“The recent tax and tariff increases would exert supply-side pressures on inflation during the year. However, since this rise in inflation is due to administrative measures, a change in the course of monetary policy action may not be warranted, as inflation expectations remain well anchored,” the annual policy statement read out by Dr. Weerasinghe said.

“Although underlying demand pressures remain subdued at present, the Central Bank will remain vigilant of any developments that could challenge the inflation outlook, so that the monetary policy action can be proactively taken to ensure that domestic price stability is maintained,” he added.
After announcing a pause in the rate cuts last November, there was some uncertainty over when the Central Bank would resume the rate cuts again or if it could do so at all, given the recent reacceleration in inflation.
The Central Bank will start gradually unwinding its outstanding monetary financing or the Treasury bill and bond stock being held on behalf of the government and while ceasing any more monetary financing or what is called as money printing in common parlance.
In further improvements envisaged to the monetary policy implementation, the Central Bank is also considering replacing the current dual policy rates with a single policy interest rate mechanism, to improve the monetary policy transmission and signalling effect of the monetary policy stance.