Sri Lanka to follow faster disinflation path, projects central bank

Domestic economic activity is expected to recover towards the latter part of 2023, compared to the large contraction in 2022.

The board, having noted the recent and expected developments and projections on the domestic and global macroeconomic fronts, was of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures.

Such tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward, enabling the central bank to bring inflation rates towards the desired levels by the end of this year, thereby restoring economic and price stability over the medium term, the bank said in a release.

Year-on-year headline and core inflation continued to decelerate in December last year for the third consecutive month. The downward adjustment in inflation rates is expected to continue this year, supported by subdued aggregate demand resulting from tight monetary and fiscal policies, expected improvements in domestic supply conditions and the pass through of easing global commodity prices to domestic prices, along with the favourable statistical base effect.

Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the central bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets.

The external sector remains resilient despite heightened challenges, and the outlook remains positive with the expected improvements in relation to ‘financing assurances’ from creditors.

The merchandise trade deficit is estimated to have contracted significantly last year compared to recent years.

ALCHEMPro News Desk (DS)