Sri Lanka's central bank held its benchmark repurchase rate steady at 6.50 percent, citing several positive developments in the past month, including faster economic growth, a decline in inflation to a level that was lower than expected and progress in the external sector.
The Central Bank of Sri Lanka has cut its rate by 100 basis points this year and said the positive developments indicated that "the monetary policy decisions implemented throughout 2013 were timely and appropriate."
A turnaround in the financial position of key public corporations led to substantial repayments to the banking sector and enabled an increased flow of financing to the private sector and a strong 27.2 billion rupee rise in credit to the private sector by banks.
"These factors augur well for future economic growth, while continued downward adjustments to longer term market rates would bolster market confidence and nurture positive investor sentiments," the central bank said, adding that continued improvement in public corporations and fiscal consolidation should make it easier to maintain the desired monetary expansion in the period ahead.
Sri Lanka's Gross Domestic Product rose by an annual rate of 7.80 in the third quarter, up from 6.8 percent in the second quarter, with all key sectors of the economy contributing positively.
"The sound, broad based growth performance in the third quarter strengthens expectations of over 7 percent economic growth for the year," the bank said, up from 6.4 percent in 2012.
Sri Lanka's inflation rate eased to 5.6 percent in November from 6.7 percent, mainly due to lower food and non-food prices, while core inflation fell to 2.4 percent. The average headline inflation rate fell to 7.3 percent in November from 7.6 percent in October.
The outlook for inflation is expected to remain benign and in "mid-single digit levels throughout 2014 as well," the bank said, citing subdued international commodity prices, improved domestic supply conditions and well contained demand-driven inflationary pressures.
The central bank aims for an average inflation rate this year of 7.0 percent and last month the bank's governor predicted that inflation should slow to between 4 percent and 6 percent in 2014, barring a major supple shock.
Earning from exports recorded its highest ever monthly value in October, rising an annual 35.1 percent to US$1.041 billion, resulting in a narrower trade deficit.
"The growth in exports heightens expectations of a durable recovery of the advanced economies leading to enhanced growth in export proceeds for the rest of the year, as well as for 2014," the bank said.