The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has announced a significant adjustment 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.
Reasons for the Policy Shift
The CBSL’s decision to ease monetary policy followed a comprehensive analysis of domestic and global economic trends. The move was driven by declining inflationary pressures, with evidence pointing to deflation and a moderation in inflation expectations in the near term. Improvements in Sri Lanka’s external sector performance also provided room for policy adjustments. Additionally, the limited capacity for further reductions in market lending rates prompted the need for alternative measures to stimulate economic activity.
Balancing Inflation and Growth
The Central Bank emphasized its commitment to achieving its inflation target of 5% while creating favorable conditions for the economy to reach its full potential. The easing of monetary policy is intended to support economic growth during a period of subdued inflationary pressures and lingering economic uncertainties. This latest adjustment reflects the Central Bank’s proactive approach to managing inflation and fostering economic recovery, underscoring its awareness of both domestic and global economic dynamics.
Anticipated Impact
The introduction of the new Overnight Policy Rate is expected to positively influence credit growth, investment, and consumer spending, paving the way for a stronger economic recovery in the coming months. Economists view the move as a signal of optimism about Sri Lanka’s capacity to navigate ongoing challenges and maintain macroeconomic stability.
Conclusion
By setting the Overnight Policy Rate at 8.00%, the CBSL has taken a crucial step in aligning its monetary policy with evolving economic realities. This policy shift balances the dual objectives of inflation control and growth stimulation, further supporting Sri Lanka’s journey toward sustained economic recovery.
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