January 30, Colombo (LNW): The Central Bank of Sri Lanka (CBSL) has opted to keep its Overnight Policy Rate (OPR) at 8.00 per cent during its first policy meeting of the year, in a bid to meet with the widespread expectations.
This decision was made with the belief that inflation will stabilise and reach the medium-term target of 5 per cent by the third quarter of 2025.
At the post-meeting media briefing, Central Bank Governor Dr. Nandalal Weerasinghe explained that the current period of deflation is primarily the result of significant reductions in fuel prices and electricity tariffs, which are supply-side factors not directly influenced by monetary policy.
Whilst monetary policy adjustments can effectively manage demand-driven inflation—by influencing the cost of money through interest rates—supply-side issues require different interventions, he emphasised.
In response to concerns that official price indices might not accurately reflect the true cost of living, particularly with rising food prices, Dr. Weerasinghe assured that the indices do indeed capture genuine price movements.
However, the CBSL Governor pointed out that since electricity and transport costs carry a significant weight in the overall Consumer Price Index (CPI), cuts in these areas can have a disproportionate impact on the index’s direction.
He also noted that deflation is likely to be deeper than originally forecast due to the substantial reduction in electricity tariffs, which were cut by an average of 20 per cent starting from January 18, 2025.
This reduction is expected to ease the financial burden on households.
Despite these positive developments, Dr. Weerasinghe acknowledged public frustration over the high cost of living, particularly as the prices of many goods have increased by over 70 per cent in recent years, without corresponding income growth.
He explained that this disparity would gradually resolve as economic growth continues, leading to higher incomes and a better balance between wages and living costs.
Looking ahead, the Governor expressed confidence in continued economic growth, supported by lower interest rates and expanding activity across most sectors.
He projected a 5 per cent growth in GDP for 2024, following a 5.2 per cent increase in the first nine months of the year. This marks the continuation of an economic recovery that began in the latter half of 2023.
Although Dr. Weerasinghe refrained from providing an official growth forecast for 2025, he indicated that the economic performance in 2024 had exceeded initial expectations, suggesting a more robust recovery than initially anticipated.
Central Bank data revealed that interest rates have now returned to near pre-crisis levels, with lending rates in many areas reflecting the easing of monetary policy.
However, some sectors still experience lending rates higher than desired. Officials also noted that short-term money market rates have adjusted downwards following the monetary easing in November 2024, with the Call Money Rate, aligned with the OPR, maintaining its targeted position.
