The Central Bank of Sri Lanka (CBSL) took a significant step to boost the economy on March 25th, 2024, by reducing key interest rates. The Monetary Policy Board lowered the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 basis points each, bringing them down to 8.50% and 9.50%, respectively.
This decision came after a thorough analysis of Sri Lanka’s current and projected economic situation, both domestically and internationally. The Board’s primary aim is to maintain inflation around the targeted mid-term level of 5% while enabling the economy to reach its full potential.
Several factors influenced the Board’s decision. They noted subdued consumer demand, the lower-than-expected impact of recent tax changes on inflation, and positive short-term inflation trends due to adjustments in electricity prices. Additionally, inflation expectations remain stable, external pressures are manageable, and market interest rates need to continue their downward trend.
While there may be some short-term inflationary risks, the Board believes they won’t significantly impact the medium-term outlook. This is because economic activity is expected to remain sluggish for a while.
The Board emphasized the importance of financial institutions swiftly and fully passing on these monetary easing measures to market interest rates, especially lending rates. This will accelerate the normalization of market interest rates in the coming months.
Furthermore, due to improved domestic money market activity and liquidity conditions, the Board decided to remove all remaining restrictions on using the Central Bank’s Standing Deposit Facility (SDF) effective April 1st, 2024. This move will further support a market-driven approach to implementing monetary policy adjustments.
The Monetary Policy Board concluded by stressing the need for all financial institutions to act swiftly in reducing their lending rates. This ensures that businesses and households fully benefit from the series of monetary easing measures implemented by the Central Bank.