Sri Lanka’s central bank announced that it would maintain policy interest rates between 8.25% and 9.25%, citing the likelihood of deflation in the near term due to easing supply conditions and adjustments to administratively controlled prices.
“The Board observed that inflation is likely to remain well below the 5% target over the next few quarters, with deflation potentially occurring in the immediate future,” the central bank stated. Core inflation is expected to stay relatively stable.
Some analysts attribute the potential deflation to the central bank’s deflationary monetary policy since late 2022, which has been supported by a stable exchange rate, providing strong monetary stability and keeping prices low.
The central bank’s stance contrasts with the belief that inflation is purely monetary, a theory criticized by classical economists for neglecting stable monetary policy. This viewpoint was linked to Western central banks’ role in triggering the Great Inflation of the 1970s.
Analysts further noted that although the price of some goods may fall, general price levels would only decrease if deflationary monetary policy continues, as the reduction in prices for select items simply shifts spending to other goods.
Most traded goods and food prices have declined sharply since September 2022, reflecting the impact of the central bank’s deflationary stance.