Sri Lanka's central bank maintained its policy rates, saying the outlook for inflation remains benign due to stable international commodity prices, contained demand pressures and inflation expectations.
However, the Central Bank of Sri Lanka, which has kept rates steady since October 2013 when it last reduced rates, added that supply disturbances triggered by adverse weather could cause temporary price fluctuations.
The central bank held its Standing Deposit Facility Rate (SDFR), which has replaced the repo rate as a benchmark, steady at 6.50 percent and the Standing Lending Facility Rate (SLFR) at 8.0 percent.
Sri Lanka's headline inflation rate rose to 3.6 percent in July from 2.8 percent in June due to higher food prices from adverse weather conditions. But it still remains below the central bank's 2014 target of 4-6 percent inflation. In 2015 and 2016 the central bank will target inflation of 3-5 percent.
Core inflation in July rose to 3.7 percent from 3.5 percent the previous month.
Data for the first half of the year indicate that economic growth this year is likely to remain broadly on target though nominal Gross Domestic Product growth is expected to be lower than the initially projected rate of 14.3 percent due to the low inflation environment, the bank said.
In the first quarter of this year, Sri Lanka's GDP rose 7.6 percent from the same quarter last year, down from a rate of 8.2 percent in the previous quarter. In June the central bank forecast growth this year of 7.8 percent, up from 7.3 percent in 2013.
Broad money in Sri Lanka grew by an annual 13.3 percent in June, up from 13.0 percent in the previous month and credit obtained by the private sector is expected to increase gradually with high levels of liquidity in domestic money markets, low short term lending rates and declining long rates.
For the full year, the central bank forecast that broad money would expand by around 13 percent on an annual basis by end-2014, down from a previously expected 14 percent.
A favorable development in exports seen in June is expected to continue for the rest of this year. Higher inflows attributed to rising workers' remittances and receipts from tourism, along with a lower trade deficit has positively impact the current account.
Earlier this month the central bank said gross official reserves on Aug. 8 topped US$9 billion for the first time in the country's history and currently stand at $9.2 billion, the bank said. The central bank has said it aims to boost reserves to $10 billion by the end of this year.
So far this year, the central bank has purchased over $1 billion from the domestic foreign exchange market on a net basis.
Earlier this month, Ajith Nirvard Cabraal, the central bank governor, told Reuters that there is a greater change of a rate cut than an increase following a report by the International Monetary Fund that called for keeping rates on hold for the near term.
The IMF forecast 2014 GDP growth of 7.0 percent and average headline inflation of 3.8 percent, down from 2013's 6.9 percent.