CBSL keeps rates unchanged


Despite the high inflation of 29% recorded in April 2022, the Central Bank of Sri Lanka (CBSL), decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) at the current levels of 13.50 per cent and 14.50 per cent, respectively.

Speaking at media briefing, the CBSL Governor said, “Headline inflation may increase to 40% in the near term. This is largely due to the recent removal of administrative prices, rupee depreciation and subsequent one off price increases. We expect Inflation to slow down once the transmission effect fully takes place.”

Since August last year, CBSL has raised policy rates by 900 basis points, which includes a 700 basis point increase in April 2022. Comparatively, treasury yields have doubled, or increased by 18%.  “We have allowed market to play the role. If we feel the interest rates have over shot, CBSL may intervene in open market operations and rupee injections. CBSL rejected all bids in excess of last week’s WA yields, to maintain rates,” stated the CBSL Governor.

Although domestic credit, in rupee terms, recorded a significant expansion in March 2022, mainly due to the valuation impact of foreign currency denominated loans, the parity adjusted domestic credit expansion is estimated to have slowed by 18 billion in March. “Imports have also come down, so we don’t have to increase rates with increase of headline inflation,” noted the CBSL Governor. 

He added, “With recent policy measures taken, there are positive developments in foreign exchange Market. Black market premiums have come down. In the ongoing process, open accounts will be banned effective from 20th May 2022. As a result, we hope the incentive for foreign exchange black market to carry on non-essential imports will come down. This will encourage more foreign exchange transactions through banking channels, which could be utilised for essential goods imports. 

In addition, the Monetary Board has decided to re-impose higher cash margin deposit requirements to open Letters of Credit for importation of a large number of non-essential goods,” stated the Governor.

Currently, as per the Foreign Exchange Act, an individual can hold foreign exchange currency of USD 15,000 up to three months, after which it has to be deposited into a foreign currency bank account.

“CBSL is planning to reduce the limit to USD 10,000. following approval from the Ministry of Finance, the new announcement would be made soon. Anyone caught holding above the stipulated amount would be given a grace period of two weeks to deposit it into a bank account or convert into rupee. The rupee is expected to appreciate with various measures taken by the CBSL. So currently, for any foreign currency holder, it’s good to convert their foreign currencies into rupees and deposit the rupees in banks to take advantage of higher interest rates.”

By Rajiesh Seetharam