The central bank says that the full beneficial effect of the overvaluation of the Sri Lankan rupee against the US dollar in the period up to 2023 has not yet been reflected in price levels.
So far this year, the Sri Lankan rupee has been overvalued by 19% against the US dollar.
An appreciation of the rupee is a factor that supports the non-inflationary process.
Headline inflation (point annualized) based on the Colombo Consumer Price Index (CCPI) (2021=100) was further decreased to 12.0% in June 2023, reflecting favourable base effects as well as falling prices in many categories, including energy and food prices.
The central bank says the disinflationary process will continue, with core inflation reflecting food inflation (annual point) and core inflation (annual point) declining to a single-digit level in June 2023.
According to the central bank’s latest forecasts, surface inflation is expected to decrease further.
It is expected to reach the single value level by the beginning of the third quarter of 2023 and stabilize at the mid-single value level in the medium term.
The after-effect of tighter monetary and fiscal policies, the expected reduction in energy and food prices and their spillovers to other sectors, and favorable statistical fundamentals as well as lower prices of goods and services due to exchange rate overhangs also support the current disinflationary process.
Further, taming inflationary expectations provides the necessary scope for easing the monetary policy stance. The decision to reduce interest rates as announced by the Central Bank yesterday is also such a decision.
The government has received funds from multilateral agencies for budget support. Further funding is expected during the remainder of this year.
A significant amount of foreign exchange has been absorbed through the domestic foreign exchange market so far in 2023.
Accordingly, by the end of June 2023, the amount of gross official reserves is estimated to be around 3.5 billion US dollars.
It also includes the foreign exchange facility obtained from the People’s Bank of China.
