The attention of the Central Bank of Sri Lanka has been drawn to a few recent media reports claiming that the Central Bank is expecting a rise in domestic interest rates in the period ahead. The reasons cited in the said reports for such expectation are a decline in reserves, higher than expected imports and increased interest rates on government securities.

The Central Bank emphasises that, based on its current projections, an increase in market interest rate is not expected in the near term. The recent movements in headline inflation, core inflation, inflation expectations, broad money growth, credit expansion, expansion in economic activity as well as the international reserve position do not justify the view that a rational market would also expect an increase in interest rates.

Sri Lanka’s external sector performance continued to improve in the month of December 2017, mainly with higher inflows to the Financial Account of the Balance of Payments (BOP). Although earnings from exports increased at a higher rate, the increase in import expenditure resulted in widening the trade deficit in December 2017. Continued inflows by way of tourist earnings and workers’ remittances, however, have contributed in curtailing the expanded trade deficit to a certain extent. Improvement in short-term and long-term capital inflows continued during the month. Reflecting the favourable developments in the external sector, the BOP recorded a surplus of US dollars 2,068 million in 2017, while gross official reserves of the country stood at US dollars 8.0 billion as at end 2017. Meanwhile, the Sri Lankan rupee depreciated by 2.0 per cent during 2017.

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