Sri Lanka's central bank held its benchmark repurchase rate steady at 7.50 percent and said inflation is expected to start declining in March and "reach a more favourable level by the end of the year."
The Central Bank of Sri Lanka, which raised rates by a 50 basis points in 2012, said the decline in inflation should also offset the upward pressure from an expected revision to administered prices.
Sri Lanka's inflation rate was steady at 9.8 percent in February from January, reflecting the remaining impact of changes to administered prices and disruptions to food supplies.
"Inflation has been at single digits over the past 49 months and the positive outlook for inflation is expected to continue, supported by well contained demand and favourable domestic and global supply conditions," the central bank said.
But the central bank voiced concern that after its rate cut in December, commercial lending and deposit rates remain high. However, following recent discussions with leading banks, the central bank expects rates to be adjusted and this should "stimulate private sector economic activity towards the growth targets for 2013."
The central bank raised rates by 75 basis points during 2012 to rein in credit growth but then cut its rate by 25 basis points in December and removed its ceiling on loan growth as inflation was declining.
Credit extended to the private sector continued to ease in January to an annual rate of 15.5 percent from the peak of 35.2 percent last March, "indicating that the relaxation of monetary policy in December 2012 is yet to be reflected in bank lending," the bank said.
Sri Lanka's balance of payments has also continued to rise and "comfortable surplus is anticipated in 2013" even if the central bank has bought $US 486 million net this year. The exchange rate has been stable due to increased foreign exchange flows to the government bond market and from tourism and private transfers, the bank said.
Sri Lanka's Gross Domestic Product expanded by an annual rate of 4.8 percent in the third quarter, down from 6.4 percent in the second. The central bank expects economic growth to reach 7.5 percent this year, above the International Monetary Fund's forecast of 6.25 percent. In 2011 Sri Lanka's economy expanded by 8.3 percent.