Policy interest rates reduced to enable economy to reach its true potential – CBSL Governor

By Hiran H.Senewiratne

‘Since local inflation has declined faster than expected, the CBSL Monetary Board has decided to reduce policy interest rates by 100 basis points to enable the economy to reach its true potential, CBSL Governor Dr. Nandalal Weerasinghe said at the monthly monetary policy review meeting held on November 24th at the Central Bank head office auditorium.

‘Moreover, as Sri Lanka has been making good progress in the IMF debt rescheduling effort up to now, it is very likely that that the second tranche in the IMF loan facility would be provided to the country in December or before the end of the year, the CBSL Governor added.

Dr. Weerasinghe said: “Policy interest rates are further reduced in view of the stable inflation outlook over the medium term and subdued demand pressures.

“Accordingly, the Monetary Policy Board of the Central Bank of Sri Lanka has decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 100 basis points (bps) to 9.00 percent and 10.00 percent, respectively.

“The Board arrived at this decision following a careful analysis of the current and expected developments in the domestic and global economy, with the aim of achieving and maintaining inflation at the targeted level of 5 percent over the medium term, while enabling the economy to reach and stabilize at the potential level.

“The Board took note of possible upside risks to inflation projections in the near term due to supply-side factors stemming from the expected developments domestically and globally.

“However, the Board viewed that such near term risks would not materially change the medium-term inflation outlook, as inflation expectations of the public remain anchored and economic activity is projected to remain below par in the near to medium term.

“Further, the Board viewed that with this reduction of policy interest rates, along with the monetary policy measures carried out since June 2023, sufficient monetary easing has been effected in order to stabilize inflation over the medium term.

“Hence, the Monetary Policy Board underscored the need for a swift and full pass-through of monetary easing measures to market interest rates, particularly lending rates, by financial institutions, thereby accelerating the normalization of market interest rates in the period ahead.”