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The Central Bank of Sri Lanka Further Reduces Policy Interest Rates

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 23 July 2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 25 basis points (bps) to 8.25 per cent and 9.25 per cent, respectively. The Board arrived at this decision following a careful assessment of the current and expected macroeconomic developments and possible risks and uncertainties on the domestic and global fronts with a view to maintaining inflation at the targeted level of 5 per cent over the medium term, while enabling the economy to reach its full capacity. In arriving at this decision, the Board considered the need to signal the continuation of the eased monetary policy stance, thereby inducing a further reduction in market lending rates to support economic activity, amidst a benign inflation outlook. The Board noted that, based on the available information, inflation is likely to remain below the inflation target of 5 per cent by a sizeable margin for the next several months before aligning with the targeted level over the medium term.

Purchasing Managers’ Indices indicate expansions in both Manufacturing and Services activities in June 2024

Sri Lanka Purchasing Managers’ Index for Manufacturing (PMI – Manufacturing) recorded an index value of 56.6 in June 2024, indicating an expansion in manufacturing activities. All the sub-indices, except for employment, remained above the neutral threshold during the month.

The expansion in New Orders and Production was mainly due to the growth in the manufacture of food and beverages sector. Stock of Purchases also expanded, in line with the increase in New Orders and Production. However, Employement remained contracted during the month, as the firms are still cautious about refilling the vacant positions. Meanwhile, Suppliers’ Delivery Time further lengthened in June, mainly attributable to the congestion in the major shipping ports.

CCPI based headline inflation accelerated in June 2024

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index (CCPI, 2021=100) accelerated to 1.7% in June 2024 from 0.9% in May 2024. This acceleration in the headline inflation is broadly in line with the projections of the Central Bank of Sri Lanka (CBSL). Even with this acceleration, inflation remained well below the inflation target of 5%.

Food inflation (Y-o-Y) accelerated to 1.4% in June 2024 from 0.0% in May 2024. Further, Non-Food inflation (Y-o-Y) accelerated to 1.8% in June 2024 from 1.3% in May 2024. On a month-on-month basis, inflation increased marginally after declining for 3 consecutive months. Accordingly, the monthly percentage increase of CCPI was 0.77% in June 2024. Meanwhile, core inflation (Y-o-Y), which reflects the underlying inflation trends in the economy, accelerated to 4.4% in June 2024 from 3.5% in May 2024.

External Sector Performance - May 2024

In May 2024, the external sector was supported by a narrowed trade deficit, higher inflows to the services account and higher workers’ remittances. 

Merchandise trade deficit on Y-o-Y basis narrowed in May 2024, although widened during January-May 2024.

Services sector inflows (excluding tourist earnings) amounted to USD 306 mn in May 2024 compared to USD 265 mn in May 2023. 

Workers’ Remittances amounted to USD 2,624 mn in Jan-May 2024 compared to USD 2,347 mn in JanMay 2023.

Tourist Earnings amounted to USD 1,406 mn during Jan-May 2024 compared to USD 752 mn during Jan-May 2023. 

Foreign investment outflows from the government securities market continued in May 2024.  

Gross Official Reserves stood at USD 5.4 billion at end May 2024, recording over USD 1 billion increase from end 2023. 

The Sri Lanka rupee remained appreciated during the year up to end May 2024. 

Foreign investments in CSE recorded a net marginal outflow in May 2024. 

SL Purchasing Managers’ Index (PMI) for Construction Industry – May 2024

Sri Lanka Purchasing Managers’ Index for Construction (PMI – Construction) recorded an index value of 54.5 in May 2024, indicating an improvement in construction activities. Many  construction projects were back on course in May after the extended holidays of the previous month. However, several respondents mentioned that the prevailed adverse weather conditions had dampened the expected improvement.

Implementation of the Banking (Amendment) Act, No 24 of 2024

The Central Bank of Sri Lanka (CBSL) wishes to announce the implementation of the Banking (Amendment) Act, No. 24 of 2024, effective from 15.06.2024. These amendments were formulated with a view to further strengthening the legal and regulatory framework applicable for licensed commercial banks and licensed specialised banks (licensed banks) to enhance the resilience of the banking sector of Sri Lanka.

The Banking Act, which provides for the introduction and operation of a procedure for the licensing of persons carrying on banking business and for the regulation and control of matters relating to the business of banking, was lastly amended in 2006. Therefore, the recent amendments were formulated considering the developments in the current regulatory framework, economic and market developments, the best practices and international standards adopted on prudential requirements to the context of the local banking sector. In addition, the observations and comments of the relevant stakeholders, viz., the banking sector, Panel of Auditors conducting audits of banks, other regulators and authorities were also considered, as appropriate, when drafting the amendments to the Banking Act.