Inflation to drop further

In December 2014, headline inflation on a year-on-year basis was at 2.1 percent compared to 1.5 percent in the previous month. Core inflation, which directly measures underlying price pressures, continued to remain between 3-4 percent while decelerating to 3.2 percent in December 2014 from 3.6 percent in November.

While low inflation is mainly attributable to contained demand pressure in the economy, it was also supported by favourable supply side developments, particularly the downward revisions in domestic energy prices in the last few months of 2014.

Subdued demand pressure and inflation expectations in the economy, the favourable impact of further reductions in fuel prices in January 2015, and the anticipated reduction of administered prices of other key commodities announced in the Government's '100-Day Program' are expected to reduce inflation further in the months ahead.

Supported by historically low market interest rates in nominal terms, credit obtained by the private sector from commercial banks continued to expand at a healthy pace.

Credit flows to the private sector increased by 6.5 percent on a year-on-year basis in November 2014,while in absolute terms, the increase was Rs. 57.8 billion during the month, bringing the cumulative credit flows to the private sector to Rs. 147.4 billion during January-November  2014.

Credit granted against immovable property, plant and machinery, personal guarantees and promissory notes, and other securities and unsecured loans increased substantially in November 2014.

It is hoped that the increasing trend in private sector credit disbursements can be sustained throughout 2015 providing the necessary impetus to the growth momentum of the economy.

Looking at the real sector, the Sri Lankan economy grew by 7.7 percent during the third quarter of 2014 supported by strong performance in the Industry and the Services Sectors.

The Industry sector, which posted a growth of 12.4 percent in the first half of 2014, maintained its growth momentum in the third quarter recording an expansion of 12.6 percent.

The performance in the Industry sector was supported by the significant growth observed in the construction, manufacturing and mining and quarrying sub sectors.

The Services sector grew by 7.0 percent while the Agriculture sector, which was hampered by weather related disruptions, contracted by 2.0 percent.

With appropriate macroeconomic policies to boost domestic and foreign investor confidence, the Sri Lankan economy is expected to record a robust performance in the period ahead.

The Monetary Board has decided that the present monetary policy stance is appropriate, and accordingly, decided to maintain the Standing Deposit Facility Rate (SDFR).