July 09, Colombo: The Monetary Board of Sri Lanka’s Central Bank has decided to further relax monetary policies and reduce policy interest rates aiming to support rapid recovery of economy hit by the COVID-19 pandemic as inflation remains subdued.

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 08 July 2020, has decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points to 4.50 percent and 5.50 percent, respectively.

“The Board arrived at this decision with a view to inducing a further reduction in market lending rates, thereby encouraging the financial system to aggressively enhance lending to productive sectors of the economy, which would reinforce support to COVID-19 hit businesses as well as to the broader economy, given conditions of subdued inflation,” the Central Banks said in its Monetary Policy Review for July 2020.

The Bank said available indicators for Sri Lanka suggest that economic growth is likely to have been severely affected by the COVID-19 pandemic during the second quarter of 2020.

“Although a rebound is expected during the second half of the year with the support of monetary and fiscal stimulus measures, the introduction of growth promoting and confidence enhancing structural reforms is imperative to foster high and sustainable economic growth over the medium term,” the Central Bank noted.

While market interest rates continued to decline, reflecting the impact of policy rate reductions and the surplus liquidity in the domestic money market, the Bank noted that further space remains for market lending rates to adjust downwards commensurate with the series of easing measures taken by the Central Bank thus far during the year.

The Monetary Board strongly reiterated that all financial institutions led by licensed commercial banks (LCBs) must pass on the full benefit of the cumulative reduction of 250 basis points in policy interest rates thus far during the year without delay.

The Central Bank said it will continue to monitor domestic and global macroeconomic and financial market developments and take further measures to ensure that the intended outcomes of already implemented policies are realized.