Sri Lanka Interest Rate

The Central Bank of Sri Lanka introduced a single policy rate of 8% on Wednesday as part of efforts to drive the country's recovery from a severe financial crisis. This marks a transition from the dual policy rate mechanism to a single overnight policy rate, effective November 27, 2024. The central bank noted that this shift simplifies the monetary policy framework, with an effective policy rate reduction of approximately 50 bps from the current level of the Average Weighted Call Money Rate (AWCMR), which will remain the operating target under the flexible inflation targeting framework. Previously, the central bank operated with two key rates: the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), which economists had estimated would be reduced by 25 bps each to 8% and 9%, respectively. However, these rates will no longer serve as policy interest rates under the new framework, the central bank stated.

The Central Bank of Sri Lanka kept its benchmark interest rates unchanged at 8.25% during its September meeting, as widely expected. This decision followed a 25bps rate cut in July, as the board anticipated that inflation may remain well below the target of 5% over the next few quarters, potentially leading to deflation in the immediate future due to changes in determined prices and easing supply conditions. On the GDP front, the economy is expected to recover further, likely growing by 4.7% yoy in Q2 of 2024 after a 5.3% expansion in Q1. The latest economic indicators suggest that the robust growth in the first half of 2024 is likely to continue through the rest of the year, resulting in higher growth than initially projected. The board mentioned it will continue to monitor and assess factors affecting inflation and economic variables before making adjustments to its monetary policy. The central bank also maintained the Standing Lending Facility Rate at 9.25%

The Central Bank of Sri Lanka unexpectedly cut its benchmark interest rates by 25 bps to 8.25% during its July 2024 meeting, following a careful current and expected macroeconomic conditions, aiming to maintain inflation at 5% over the medium term while supporting economic growth. Sri Lanka's annual headline inflation rate rose to 1.7% in June 2024, up from 0.9% in the previous month, yet still well within the targeted level of 5%, driven by downward revisions to electricity tariffs, fuel, and LP gas prices, alongside relatively weak demand conditions. Meanwhile, the country's economy grew by 5.3% year-on-year in Q1 2024, marking the third consecutive quarter of growth. This robust performance is expected to continue, driven by relaxed monetary policy, improved supply conditions, rising external demand, and a revival in tourism. The central bank also reduced the Standing Lending Facility Rate by 25 bps to 9.25%.