The Central Bank of Sri Lanka, which cut rates by 25 basis points in December 2012 after raising them twice earlier in the year, said inflation "fell significantly" as expected in March due to the base effect and lower food prices and inflation should remain at this "benign" level.
However, a proposed revision to administered prices is likely to exert some upward pressure on price levels, the central bank added.
In March the headline inflation rate fell to 7.5 percent from an average 9.4 percent for the previous nine months while core inflation eased to 6.8 percent from 7.4 percent in February. Both inflation measures have been in single digits for 50 consecutive months.
After raising rates in early 2012 to rein in credit growth, the central bank cut rates in December and removed a ceiling on credit growth, and said these measures are "providing reasonable stimulus for a higher economic growth."
"At the same time, further depreciation of demand driven inflation on a sustainable basis would provide space for further easing of monetary policy," the central bank said.
In 2012 Sri Lanka's economy expanded by 6.4 percent for average growth of 7.5 percent over the last two years, based on resilient agriculture during adverse weather and sustained industry activity. Although tourism and finance grew rapidly, its growth was moderate due to low external trade.
The central bank has forecast growth of 7.5 percent this year, down from 2011's 8.3 percent.
Credit extended to the private sector rose by an annual 13.3 percent in February and with the public sector relying less on bank financing in coming months, this should help provide the necessary stimulus to strengthen private sector activity, the bank said
Sri Lanka's balance of payments, which recorded a surplus of US$ 151 million at the end of 2012, remains in surplus so far this year and is expected to improve further. Gross official reserves have risen to $6.9 billion, enough for 4.5 months of imports.