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The Central Bank of Sri Lanka (CBSL) last week said the increase in Value Added Tax (VAT) and the removal of certain exemptions applicable on VAT and the Nation Building Tax (NBT) with effect from 01 November 2016 are only expected to have a one-off impact on inflation as observed in May/June 2016.

The Bank, which kept interest rates steady in its latest policy announcement, said that however, in spite of these transitory developments, inflation is expected to remain in mid-single digit levels supported by prudent monetary policy measures and the realisation of the improvements in the fiscal sector.

“As domestic supply conditions continued to normalise gradually, year-on-year headline inflation remained in mid-single digits in October 2016. Core inflation also remained subdued during the month,” the Central Bank said.

The Monetary Board last week decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively.

The CBSL announcement said that growth in credit granted to the private sector by commercial banks decelerated to 27.3 per cent (year-on-year) in August 2016, from 28.5 per cent recorded in the previous month, amidst a continuous upward adjustment in market interest rates.

“The moderation of private sector credit coupled with net repayments to the banking system by the government and public corporations contributed to a deceleration of domestic credit granted by commercial banks in the month of August 2016. As a result, broad money (M2b) growth decelerated to 17.3 per cent, year-on-year, in August 2016, compared to a growth of 17.8 per cent recorded in the previous month,” the Bank pointed out.

It added that the gross official reserve position was estimated at US dollars 6.5 billion at end September 2016, while the Sri Lankan rupee depreciated by 2.1 per cent against the US dollar thus far during 2016.

“Confidence gained from the continuation of the Extended Fund Facility (EFF) Program with the International Monetary Fund (IMF) is expected to catalyse medium to long term financial flows to the country, thereby strengthening the external sector of the economy, going forward,” the financial regulator said.