Current policy rate sufficient to bring inflation back to 5% target: CBSL

Last Updated on January 30, 2025 6:06 am

In line with widespread expectations, the Central Bank kept its Overnight Policy Rate (OPR) — its new key policy rate — at 8.00 percent at its first policy meeting of the year.

This decision was made with confidence that inflation will return to the medium-term target of 5 percent by the third quarter of this year.

Speaking at the post-meeting media briefing, Central Bank Governor Dr. Nandalal Weerasinghe noted that the current stretch of deflation is predominantly due to repeated cuts in fuel prices and electricity tariffs, which are supply-side factors and cannot be addressed through monetary policy adjustments.

Monetary policy is better equipped to manage inflation caused by demand-side factors by either raising or lowering the cost of money through interest rate adjustments.

Responding to questions about whether current prices distort reality—amid widespread concerns about rising food prices not being fully reflected in official price indices—he said the indices accurately reflect true prices. However, electricity and transport have a larger weighting in the overall Consumer Price Index, which can sway its direction when prices in those sectors are cut.

In fact, Central Bank’s projected deflation for the next couple of months could be deeper than originally estimated due to the larger-than-anticipated reduction in electricity tariffs announced in January 2025.

Electricity tariffs were cut by an average of 20 percent, effective from 18 January, putting some money back into households’ pockets.

However, Dr. Weerasinghe acknowledged public concerns over the cost of living, which may not be fully reflected in price indices, as Sri Lankans are still grappling with an over 70 percent increase in the cost of most goods—without a corresponding rise in incomes.

He explained that this impact would only ease once incomes catch up with prices, which will happen gradually with sustained economic growth.

Dr. Weerasinghe remains optimistic about continued economic expansion, supported by lower lending rates and increased activity across almost all sectors.

This outlook builds on an estimated 5 percent growth in the economy for 2024, as GDP grew by 5.2 percent in the first nine months, extending the economic recovery that began in the third quarter of 2023.

The Governor stopped short of announcing an official growth forecast for 2025, citing a lack of sufficient evidence on economic performance. However, he noted that growth in 2024 was expected to have been stronger than initially anticipated.

Central Bank data also showed that interest rates have fallen close to pre-crisis levels from three years ago, although in some cases, lending rates for certain client segments remain higher than desired.

Central Bank officials further noted that following the monetary easing in November last year, short-term money market rates have adjusted downwards, with the Call Money Rate, targeted by the OPR, remaining aligned.