Central Bank expects to further reduce short-term interest rates in couple of months if inflation continues to fall as expected.
In an exclusive interview with The Wall Street Journal Central Bank Governor Ajith Nivard Cabraal has said that the decision to cut interest rates will be taken around September or October but for the time being the monetary policy will remain unchanged.
"If we feel very confident with the events of the next few months, then we would feel a little more inclined to relax further," Mr. Cabraal has said.
The Central Bank in May this year eased policy interest rates by 50 basis points to 7.0% Repurchase rate and 9.0% Reverse Repurchase rate.
Sri Lanka's inflation decreased in June to 6.8% and the Central Bank expects the inflation to fall further to around 5% or 5.5% by the end of the year and the economy to grow by 7.5%.
The policy rate cuts will depend on how the inflation will perform, Cabraal, who is in the U.S. to brief investors on Sri Lanka's finances told the Wall Street Journal.
Speaking of the United States Central Bank's plans for withdrawing the monetary stimulus, Cabraal said Sri Lanka is largely prepared for the Fed's exit because it has tried to limit its exposure to swift changes in capital flows.
According to the Governor, Sri Lankan authorities, focusing on international investors looking for long-term exposure, have been careful not to open up their debt markets too wide, too fast and U.S. investors have tended to buy long-term Sri Lankan debt.
Cabraal has noted that the Central Bank has doubled its cash reserves in the last several years and plans to continue stock filing foreign-exchange reserves over the next several years to give it an even bigger buffer against market volatility.
The Sri Lankan government is also continuing to cut the budget deficit since the end of the civil war in 2009, he added.
Investor demand, strong growth, a declining deficit and the end of conflict has pushed borrowing costs down several percentage points, according to Cabraal.
However, he expressed concerns over the euro-zone crisis, which threatens the global economy, since Europe is one of Sri Lanka's largest export markets. He said Sri Lankan firms are now looking for alternative export markets and the Sri Lankan authorities are trying to negotiate a free trade agreement with China.