Sri Lanka has cut its policy interest rate corridor by 50 basis points to 7.0 and 9.0 percent to boost credit, saying inflationary pressures were in check, amidst warnings by the International Monetary Fund to be careful.
“[T]here is now a need to stimulate the domestic economy, particularly in the light of the gradual moderation in headline inflation and subdued demand pressures in the economy,” the Central Bank said in its May monetary policy review.The IMF has warned against loosening policy, saying Sri Lanka has had a history of high inflation from loose policy.
But Central Bank said the economy has seem to have developed a greater capacity to have high growth without fuelling inflation and international commodity prices were also seen softening.
The central bank said after spiking sharply in April, its holdings of Treasuries which represents printed money on the asset side of its balance sheet has started to fall. In April the Central Bank is usually forced to print money to pay salary advances of state workers.
“Nevertheless, the situation has improved during the past few weeks with the Government being able to settle a part of its dues through the retirement of Treasury bills held by the Central Bank, with the outstanding Treasury bill stock declining to Rs. 119 billion by end April,” the Central Bank said.
“In this regard, a pick-up in domestic economic activity in the balance part of the year is expected to generate higher tax revenues, thereby helping achieve the fiscal targets set out for the year.