The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has announced a significant shift in its monetary policy stance, introducing a new Overnight Policy Rate (OPR) set at 8.00% during its meeting on 26 November 2024.
This adjustment effectively reduces the policy interest rate by approximately 50 basis points, reflecting the difference from the current Average Weighted Call Money Rate (AWCMR), which remains the operational target under the Flexible Inflation Targeting (FIT) framework.
Why the Policy Shift?
The decision to ease monetary policy followed a detailed evaluation of domestic and global economic trends. Key factors influencing the move include:
- Deeper-than-Expected
Deflation:
Evidence of declining inflationary pressures and a notable moderation in underlying inflation expectations in the near term. - Encouraging
External Developments:
Better-than-anticipated improvements in Sri Lanka’s external sector, providing room for policy adjustments. - Limited Room for
Lending Rate Cuts:
Acknowledgment of the constrained capacity for further reductions in market lending rates, necessitating alternative measures to support economic activity.
Focus on Inflation and Economic Growth
The CBSL reiterated its commitment to achieving an inflation target of 5% while fostering conditions for the economy to operate at its full potential. The easing of the monetary policy is expected to provide much-needed support for growth amid subdued inflationary pressures and lingering economic uncertainties.
This latest policy shift underscores the Central Bank’s proactive approach to balancing inflation management with the need to stimulate economic recovery, reflecting a keen awareness of both local and global economic dynamics.
Looking Ahead
Economists anticipate that the new Overnight Policy Rate will positively influence credit growth, investment, and consumption, paving the way for a more robust economic recovery in the months ahead. The move signals optimism about Sri Lanka’s ability to navigate ongoing challenges and maintain macroeconomic stability.
This policy adjustment represents a critical step in aligning Sri Lanka’s monetary policy with evolving economic realities.
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