Sri Lanka's central bank held its benchmark repurchase rate steady at 7.50 percent, saying the current policy stance was appropriate for economic growth to reach 7.5 percent this year and the risks of higher inflation were minimal.
The Central Bank of Sri Lanka, which raised rates by a net 50 basis points in 2012, said effective demand policies last year were likely to have moderated aggregate demand sufficiently and this had helped rein in future inflation and inflationary expectations.
"As a result, inflation is projected to moderate from March 2013 and reach mid-single digit levels thereafter," the bank said in a statement.
In December, Sri Lanka's inflation rate eased to 9.2 percent from 9.5 percent in November.
Credit extended to the private sector by commercial banks - which has been declining steadily following policy tightening in early 2012 - is targeted to grow by around 18.5 percent this year and the central bank said it would closely monitor this to make sure this takes place.
"At the same time, since such rate of credit expansion is considered adequate to deliver an economic growth of 7.5 percent in 2013 without giving rise to any unfavourable demand driven inflationary pressures, the risk of future inflation increasing is expected to be minimal," the bank said.
In November private sector credit growth eased to 20.7 percent from a peak of 35.2 percent in March 2012 and net credit obtained by the government also declined substantially in December as a result of government efforts to meet fiscal targets.
Sri Lanka's Gross Domestic Product expanded by an annual rate of 4.8 percent in the third quarter, down from a rate of 6.4 percent in the second quarter. In 2011 Sri Lanka's economy grew by 8.3 percent and the economy is estimated to have expanded by 6.5 percent in 2012.
The central bank said it was targeting a higher balance of payments surplus in 2013 based on a better trade balance, increased earnings from service exports, higher remittances and increased flow to the government and capital markets from direct foreign investments.
"As a result of the significant foreign inflows already being witnessed, the rupee, which appreciated by 5.3 percent against the US dollar during the second half of 2012, appreciated further by 0.6 percent by 15 January 2013," the bank said.