Growth momentum to continue – CBSL

Possible spillovers to boost economy

Inflation expected to slow further in near term

Growth momentum with the support of appropriate policies is expected to continue in the short-term and gradually move towards its potential over the medium term, the Central Bank  Monetary Policy Report 2024 issued by the Economic Research Department of the Central Bank of Sri Lanka said.

Possible revival of import-dependent businesses along with pickup of activity related to large capital infrastructure developments too would push up the growth momentum. Possible spillovers due to faster than expected recovery of tourism will also boost up growth momentum.

Downward revisions to energy prices have helped ease headline inflation in recent months. Headline inflation is expected to slow further in the near term and is likely to be below the target until Q1-2025. A temporary uptick in inflation towards H2-2025 is anticipated before gradually stabilising around the targeted level of 5%.

The report however says that inflation outlook may change in the event of possible realisation of demand for higher wages. In addition, possible upward pressures on global food and energy prices amidst uncertainty may also have a negative impact on inflation targets. Adverse weather/climate conditions which could affect agricultural production may impact inflation targets while a rupee depreciation and a sustained impact of diminished purchasing power of people are some of the other causes that may ‘up’ the inflation.

The Central Bank also continued to reduce its key policy interest rates. In March 2024 policy interest rates were reduced by 50 bps to 8.50% (SDFR) and 9.50% (SLFR) and in July 2024 Policy interest rates were reduced by a further 25 bps to 8.25% (SDFR) and 9.25% (SLFR). “The Central Bank is maintaining an accommodative stance, having reduced policy rates by 75 bps this year alone. This comes on top of a significant 650 bps reduction in 2023,” the report said.

In keeping with Sections 27 and 80 of the CBA, the Monetary Policy Report is prepared to communicate to the public and other stakeholders the rationale for the monetary policy decisions taken during the relevant period of review, while providing guidance on the inflation and economic growth outlook along with an assessment of risks to the outlook. However, the report says that high brain drain could lead to labor shortages resulting in low productivity.

Any political uncertainty could have negative impacts on economic recovery and growth momentum. (SS)

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