Sri Lanka's central bank maintained its monetary policy stance, as expected, and said inflation is expected to remain in mid-single digits throughout 2014 while economic growth has shifted into "a higher and sustainable growth trajectory."
The Central Bank of Sri Lanka, which rejigged its monetary policy framework in January, said that although the outlook for inflation remains encouraging from a demand perspective, it would closely monitor possibly supply disruptions from drought in certain parts of the country.
Sri Lanka's headline inflation rate eased to 4.2 percent in February from 4.4 percent in January while core inflation fell to 3.1 percent from 3.5 percent due to subdued demand and improved domestic supply of most food items, the bank said.
The central bank targets inflation of 4-6 percent this year and 3-5 percent in 2015 and 2016.
The bank today kept its Standing Deposit Facility Rate (SDFR), which replaced the previous repo rate, at 6.50 percent and the Standing Lending Facility Rate (SLFR) at 8.0 percent, maintaining the spread in its Standing Rate Corridor (SCR). In 2013 it cut the repo rate by 100 basis points.
Sri Lanka's Gross Domestic Product expanded by 7.3 percent in 2013, up from 6.3 percent in 2012, as fourth quarter GDP rose by an annual 8.2 percent on the back of a surge in agriculture and industry while services showed some moderation.
During 2013 the industry sector grew by 9.9 percent, agriculture 4.7 percent and services by 6.4 percent, the bank said.
In January earnings from exports grew by 23.2 percent year-on-year, sustaining the growth momentum that started in June 2013. Expenditure on imports rose by 7.9 in the same month with the trade deficit narrowing by 5.9 percent to US$ 756 million.
Gross official reserves rose to $8.0 billion by the end of January, the equivalent of 5.3 months of imports, supported by the proceeds from January's sovereign bond issue and inflows to the government securities market.
Credit to Sri Lanka's private sector by commercial banks slowed in January, growing by 5.2 percent in January from 7.5 percent in December, but the bank said this was largely due to the settlement of short term advances by corporates and a decline in pawning and trade related credit.
"However, the Monetary Board is of the view that the deceleration of the growth in credit to the private sector is temporary, and going forward, private sector credit is likely to rebound from the second quarter of the year, supported by declining market lending rates, sufficient liquidity levels and increased demand for exports from the advanced economies," the bank said.
Earlier this month, Sri Lanka's treasury secretary told Reuters that interest rates would remain steady for the next two to three months as the banking sector is facing poor private sector credit growth.