The Central Bank said in its March monetary policy statement that the repo rate at which excess money is drained from the system will be kept at 7.5 percent and the reverse repo rate at which money is injected will be kept at 9.5 percent.
"However, inflation is expected to turnaround from March 2013 onwards, and reach a more favourable level by the end of the year," the Central Bank said.
Sri Lanka's Central Bank kept inflation at low single digits with a rupee peg acting as an external anchor but, lost control of the monetary system from mid 2011 by trying to sterilize foreign exchange sales with printed money and not allowing market rates to go up.
Sri Lanka's rupee started to depreciate from February 2012, after the currency peg was allowed to move according to fresh money printed by the Central Bank, with the rupee falling to 134 rupees to the US dollar from 110 by mid-year and diving inflation up.
In second half of the year the rupee appreciated towards 127 to the US dollar.
The Central Bank said it had bought 486 million US dollars from the market so far this year.
"So far during the year, the balance of payments has continued to record a surplus, and a comfortable overall surplus is anticipated in 2013," the Central Bank said.
"In fact, although the Central Bank has purchased US dollars 486 million on a net basis from the market this year, greater stability of the exchange rate has been observed owing to increased foreign exchange inflows to the government securities market, and from tourism and private transfers."
Credit to the private sector has fallen to 15.5 percent in the year the January 2013 from 35.2 percent in March 2012.
In December the Central Bank cut policy rates by 25 basis points, despite high inflation, causing concerns.
Central Bank said it wanted to interest rates in banks to fall faster.
"..[I]t has been a matter of some concern that two months after relaxing monetary policy, interest rates pertaining to both deposit and lending interest rates still remain high," the Central Bank said.
"However, following recent discussions that the Central Bank had with leading commercial banks, it is anticipated that both deposit rates and lending rates will be adjusted in the near term, in line with the direction of monetary policy.
"When such adjustment takes place, it is expected to stimulate private sector economic activity towards the growth targets for 2013."
Even in December there was heavy state borrowing from commercial banks, crowding out private borrowers and keeping interest rates high.
But the monetary authority said borrowings from state enterprises will fall.
"…[W]ith the expected price adjustments in the energy sector, the state owned enterprises would be able to reduce their reliance on bank financing, resulting in the release of additional resources for the private sector," the Central Bank said.
"That outcome would, in turn, enable the private sector to enhance its level of investment in order to expand economic activity through the utilisation of the improved physical infrastructure that has been put in place by the Government in recent times."
Banking sector analysts say some state banks which are lending heavily to the state and state enterprises have been paying rates close to those of better managed finance companies for larger fixed deposits, keeping rates high within the system.
But state banks deposit rates have fallen over this week.
Recently about 1,800 people were recruited into state banks, which analysts say would push up costs and require higher margins for them to maintain profitability.