November 27, Colombo (LNW): The Central Bank of Sri Lanka (CBSL) has transitioned to a single policy interest rate mechanism, effective today (27 November), marking a shift from its dual policy interest rate system. The newly introduced Overnight Policy Rate (OPR) will serve as the central bank’s primary monetary policy tool, aligning with its Flexible Inflation Targeting (FIT) framework.
This move, first announced in the Central Bank’s Annual Policy Statement in January 2024 and reaffirmed in September 2024, represents a significant step toward enhancing the efficiency and transparency of monetary policy in Sri Lanka.
Key Features of the New Mechanism
- Primary Tool: The OPR will be periodically reviewed and adjusted by the CBSL to signal changes in its monetary policy stance.
- Interbank Target: The CBSL aims to maintain the Average Weighted Call Money Rate (AWCMR), the rate at which banks transact in the interbank market, at or around the OPR. The AWCMR will continue to be the operating target under the FIT framework.
- Standing Facilities:
- The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will remain operational for overnight transactions.
- These rates will now be linked to the OPR with pre-determined margins and will provide the lower and upper bounds, respectively, for interbank call money rates.
- However, SDFR and SLFR will no longer be considered policy interest rates.
FIT Framework Goals
The CBSL’s monetary policy, guided by the FIT framework, aims to:
- Maintain headline inflation at a target rate of 5%.
- Foster sustainable economic growth by improving monetary policy transmission to financial markets and the broader economy.
This streamlined approach is expected to enhance monetary policy signalling, making it more effective in addressing inflation and fostering economic stability. The CBSL remains committed to using the FIT framework to balance inflation control and economic growth.
