Sri Lanka Central Bank further reduces policy rates

The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points (bps) to 8.50 percent and 9.50 percent, respectively.

The Board said it arrived at this decision at its meeting held on 25 March 2024 following a comprehensive assessment of current and expected domestic and international economic developments, to maintain inflation at the targeted level of 5 percent over the medium term, while enabling the economy to reach its potential.

“In arriving at this decision, the Board took note of, among others, subdued aggregate demand conditions, the lesser-than-expected impact of the recent changes to the tax structure on inflation, favourable near-term inflation dynamics due to the recent adjustment to electricity tariffs, well-anchored inflation expectations, the absence of excessive external sector pressures and the need to continue the downward trajectory in market interest rates.”

The Board observed that the possible upside risks to inflation in the near term would not materially change the medium-term inflation outlook, as economic activity is projected to remain below par for an extended period, the statement said.

The Monetary Policy Board underscored the need for a swift and full passthrough of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalisation of market interest rates in the period ahead.

The Board also noted the improvements in domestic money market activity alongside the improvement in liquidity conditions and decided to remove the remaining restrictions on the usage of the Standing Deposit Facility (SDF) of the Central Bank with effect from 01 April 2024.

“This would further support market-based transmission of monetary policy adjustments,” it said.

“The Monetary Policy Board stressed the need for all financial institutions to take swift measures to reduce market lending interest rates to ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households.”