Sri Lanka's central bank maintained its benchmark repurchase rate at 7.0 percent, saying inflation is expected to remain at single digit levels for the remainder of the year, apart from minimal seasonal variations, due to improved inflation expectations, supply side improvements and an absence of demand driven pressures.
The Central Bank of Sri Lanka, which cut rates in May and December, also said the recent 200 basis point cut in the Statutory Reserve Ratio (SRR) had contributed to the monetary policy relaxation process and provided financial markets with further stimulus to support economic growth, leading to a downward momentum in Treasury yields and lower short term and deposit rates at commercial banks.
Sri Lanka's trade deficit has also narrowed but the central bank added that "weaker than expected economic performance in advanced economies may yet prove to be a dampener in revitalising external demand and would need to be watched carefully in the months ahead."
Like other emerging markets, Sri Lanka's rupee weakened in May, though less than many other currencies. It was quoted at 131.7 to the U.S. dollar today, down 3 percent this year. The central bank made no reference to foreign exchange in its statement.
Credit to the Sri Lanka's private sector has also been expanding following the central bank's easing, with credit up by 18.3 billion rupees in May from 7.6 billion in the previous month while credit to the government decelerated, as expected, helping release funds from the banking sector to provide additional stimulus to the private sector.
The central bank's decision was widely expected following an interview by the bank's governor last week in which he said that monetary policy was likely on hold until September or October when the bank would "be a little more inclined to relax further" if inflation continues to fall.
Last month the central bank also said it expected inflation to remain in single digits due to supply side improvements and the absence of demand driven pressures. This month it added the reference to inflation expectations.
In June Sri Lanka's headline inflation rate eased to 6.8 percent from 7.3 percent and core inflation fell to 4.3 percent, the lowest since its inception.
The central bank is aiming for inflation to ease to 5.0-5.5 percent by the end of the year and average 7 percent for the year.
Sri Lanka's Gross Domestic Product grew by an annual 6.0 percent in the first quarter, down from 6.3 percent in the previous quarter and the central bank is targeting growth of 7.5 percent this year, up from 6.4 percent in 2012.