MUMBAI: Sri Lanka's central bank kept its key interest rates unchanged on Tuesday and reiterated the requirement for lower lending rates in banks to boost economic growth in the absence of demand-driven inflation.

The Central Bank of Sri Lanka (CBSL) said it would maintain its accommodative monetary policy stance, considering the macro-economic conditions and expected developments on the domestic and global front.

The CBSL kept the standing deposit facility rate and the standing lending facility rate at 4.50% and 5.50%, respectively. The statutory reserve ratio was also left unchanged at 2%.

"Although deposit rates are not expected to decline further, the high level of excess liquidity in the domestic money market leaves sufficient space for market lending rates to adjust downward, thereby providing low cost funds to the economy," the CBSL said in its statement.

The onset of the second wave of COVID-19 is expected to have dampened the momentum for GDP in the fourth quarter of 2020 and the economy is expected to have contracted by around 3.9% for the full year 2020, the central bank said.

The bank, however, expects the economy to rebound in 2021 with the support of stimulus measures.

"Reopening the country for tourist arrivals under strict health guidelines could help improve external sector conditions in the period ahead," CBSL said.

The central bank has cut interest rates by 350 basis points since May 2019, when the deadly Easter bomb attacks triggered a slump in investment and tourism, which was followed by the coronavirus pandemic.

"Inflation could briefly accelerate over the medium term," CBSL said on account of the improvement in demand on back of policy stimuli but said it broadly expects it to remain in the 4-6% target range.

It expects the external sector to remain resilient with the trade deficit continuing to narrow and a rebound in workers' remittances seen since the second half of 2020.