The Board arrived at this decision following a careful analysis of current and expected developments in the domestic economy and the financial market as well as the global economy.
This decision supports a continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity given the favourable medium term outlook for inflation, which is well anchored within the 4-6 per cent range.
The bank said that downward revisions to global growth projections were announced in the January 2020 update of the World Economic Outlook (WEO) of the International Monetary Fund (IMF), owing to weaker than expected growth across emerging market economies, especially India.
Global economy is estimated to have grown by 2.9 per cent in 2019 and projected to grow by 3.3 per cent and 3.4 per cent in 2020 and 2021, respectively. Meanwhile, global growth prospects have been further threatened by the spread of coronavirus originated in China. In light of subdued global growth and softening inflationary pressures, central banks of advanced economies continued to maintain an accommodative policy stance, while a number of emerging market economy central banks eased monetary policy further thus far in 2020.
As suggested by available indicators and latest estimates, domestic economic activity has remained subdued in the fourth quarter of 2019, primarily with subpar growth in Agriculture and Industry related activities. However, in 2020, a revival in economic activity is envisaged supported by appropriate fiscal and monetary measures, improved business confidence and political stability.
The economy is expected to reach its full capacity over the medium term, benefitting from the low and stable inflation environment, a competitive exchange rate, low lending rates as well as improved consumer and investor sentiment. The growth momentum of the economy is expected to be sustained through the implementation of appropriate structural reforms designed in line with the policy priorities of the government.
Headline inflation, as measured by the year-on-year change in Colombo Consumer Price Index (CCPI), accelerated in December 2019 owing to domestic supply disruptions. In spite of such short term fluctuations, the near term forecast suggests that inflation will hover below 5 per cent in 2020, and stabilise between 4-6 per cent thereafter, assisted by appropriate policy measures and underpinned by well anchored inflation expectations. Meanwhile, National Consumer Price Index (NCPI) based headline inflation, which attaches a higher weight to the food basket, also accelerated in December 2019. Nevertheless, reflecting subdued aggregate demand conditions, core inflation, measured using both CCPI and NCPI, decelerated.