Sri Lanka's central bank held its benchmark repurchase rate steady at 7.0 percent, as expected, and said there was room for market rates to fall further and the reduction in lending rates so far had been inadequate to reflect the central bank's policy stance and low inflation.
The Central Bank of Sri Lanka, which has cut rates by 75 basis points since December last year, said inflation is expected to remain in single digits during the rest of this year and in mid-single digits in 2014 and this would be "conducive for sustained economic growth and improved domestic and international investor confidence."
Global developments have been reasonably encouraging, the central bank said, and the "positive developments in advanced economies, if continued, would augur well for domestic economic growth as a result of a stronger performance of the external sector."
However, the bank added that the "wide fluctuations of currencies of trading partners and competitors in the international market would need to be closely monitored in order to address any adverse effects on Sri Lanka's external balance in the period ahead."
Exports from Sri Lanka showed some turnaround in June, recording a positive year-on-year growth after a decline seen in the past 15 months, while imports also rose in June so the trade deficit rose.
But inflows to commercial banks and to the stock market along with foreign direct investment inflows showed that foreign investor confidence had remained "unchanged despite the volatility caused by global markets reacting to the prospects of the tapering of quantitative easing by advanced economies," the central bank said.
Inflation in Sri Lanka eased further in July to 6.1 percent from 6.8 percent in June and core inflation fell to 3.1 percent from 4.3 percent, continuing the declining trend seen since March after headline inflation approached 10 percent in the second half of 2012 and first few months of this year.
Sri Lanka's Gross Domestic Product rose by an annual 6 percent in the first quarter, down from 6.3 percent in the fourth quarter.