Sri Lanka's central bank held its benchmark repurchase rate steady at 7.0 percent as two recent rate cuts are expected to boost economic growth in coming months and inflation is expected to remain in single digits.
The Central Bank of Sri Lanka, which cut its key rates in May and December by a total of 75 basis points, said financial institutions and markets have responded as expected with deposit rates, call money and prime lending rates declining.
"It is expected that the easing of monetary policy since December 2012 would transmit smoothly to lending rates in the near future, thereby stimulating a sustained increase in longer term credit growth to the private sector, thus contributing to a higher level of economic activity, over the coming months," the central bank said in statement.
The central bank's decision was widely expected following statements earlier this week by its governor, Ajith Nivard Cabraal, that rates were appropriate following the two rate cuts.
Sri Lanka's inflation picked up speed in May to 7.3 percent from 6.4 percent in April but still below the 9-10 percent rate seen in the nine months from June 2012 through February.
The central bank attributed the rise in prices to an adjustment in electricity prices, but added that core inflation continued its decreasing trend from February and was at 5.7 percent in May so both core and headline inflation have remained in single digits for 52 consecutive months.
"Going forward, inflation is expected to remain at single digit levels, supported by supply side improvements and the absence of demand driven inflationary pressures," the bank said.
Growth in broad money moderated further in April to 15.2 percent from 15.6 percent in March, in line with the central bank's expectation, but growth of credit to the private sector decelerated to 10.2 percent in April from 10.9 percent, partly reflecting the high base, the bank said.
Sri Lanka's balance of payments continues to be in surplus and is expected to improve further, and the central bank has bought some US$ 580 million from the domestic market so far this year, raising the gross official reserves to US$ 6.9 billion by the end of April, the equivalent of 4.4 months of imports, with the rupee strengthening against major currencies during the year.
The central bank's two recent rate cuts were aimed at boosting economic activity and the central bank governor confirmed this week that first quarter activity had been slower than expected. First quarter data will first be released by the middle of this month.
However, the central bank was maintaining its 7.5 percent growth target for 2013, up from 2012's 6.4 percent but down from 2011's 8.2 percent. Inflation this year is forecast to average some 7 percent.