Sri Lanka's central bank rejigged its policy framework, replacing its current policy rate corridor with a Standing Rate Corridor (SCR) and renamed the standing repurchase facility as the Standing Deposit Facility (SDF) with the rate for this facility, the Standing Deposit Facility Rate (SDFR), becoming the rate for the placement of overnight excess funds for banks and setting a floor for the corridor.
The SDFR replaces the bank's repurchase rate with open market operation auctions continuing as usual, depending on liquidity conditions in money markets. The Central Bank of Sri Lanka cut the repurchase rate by 100 basis points this year to 6.50 percent and held SDRF steady at this level.
The central bank's current Standing Reverse Repurchase Facility will be renamed as the Standing Lending Facility (SLF) and the Standing Lending Facility Rate (SLFR) will be the rate for the lending of overnight funds to the banking system, setting the upper limit in the corridor.
The central bank also said volatility in the call money market had eased substantially so a compression of the new rate corridor was warranted with the lending rate, or SLFR, cut by 50 basis points to 8.0 percent, compressing the corridor to 150 basis points from 200 basis points.
"It is expected that this compression will facilitate the reduction of the interest spread of banks over time, without affecting the deposit rates offered by banks to their customers," the bank said.
The central bank also said it expected "economic growth to accelerate further during the new year, while inflation is projected to remain in mid-single digits."
Sri Lanka's Gross Domestic Product set is to expand by around 7.2 percent in 2013, the bank said, with both current and capital accounts of the balance of payments improving, increasing the exchange rate and the international reserves.
At the same time, Sri Lanka's headline and core inflation rate eased further, hitting 4.7 percent and 2.1 percent, respectively in December. For 2013 the average headline rate was 6.9 percent, down from 7.6 percent in 2012, while the core rate fell to 4.4 percent from 5.8 percent.
"The continued easing of monetary policy through 2013 amidst low and stable inflation has brought about the desired macroeconomic outcomes," the bank said.
Higher inflows from the export of services and workers' remittances improve the current account while "substantial foreign capital inflows" resulted in a balance of payment surplus over over US$ 700 in 2013 compared with $151 in 2012.
Gross official reserves rose to a provisional $7.1 billion by end-2013, the bank said.
The central bank's governor, Ajith Nivard Cabraal, later told a forum in Colombo that he expects 2014 economic growth of 7.8 percent and then gradually accelerate to a growth rate of 8.5 percent in 2016, according to press reports. In 2012 the country's economy grew by 6.4 percent.
The central bank's target range for 2014 would be 4-6 percent and then 3-5 percent until 2016. In 2013 the central bank aimed for inflation of 7.0 percent.