By: Isuru Parakrama
November 28, Colombo (LNW): The Central Bank of Sri Lanka has introduced a new primary policy tool known as the overnight policy rate (OPR), setting it at 8.00 per cent.
This marks a 50-basis-point reduction in the central bank’s policy stance, targeting the call money rate, which is commonly used in the interbank market.
The call money rate, which stood at 8.55 per cent the previous day, is now expected to align closely with the OPR, reinforcing the Central Bank’s efforts to influence market lending rates more effectively.
Governor Nandalal Weerasinghe explained that this shift to a single policy rate structure would enhance the effectiveness of monetary policy, facilitating smoother transitions in both the government securities market and the broader economy.
By targeting the call money rate—the interest rate at which commercial banks lend to each other overnight—the OPR will serve as a more precise tool for adjusting market lending rates and guiding overall economic activity.
The move comes amidst a deflationary environment that has seen Sri Lanka experience two consecutive months of falling prices, with no immediate signs of inflation returning to positive figures until mid-2025.
In this context, the Central Bank has opted to ease its monetary stance further, expecting inflation to gradually converge towards the target level of 5.0 per cent over the medium term.
The immediate impact of the OPR adjustment was evident in the Treasury bill auction held shortly thereafter, where yields dropped significantly.
The benchmark one-year Treasury bill yield, in particular, fell by 70 basis points to 9.08 per cent, indicating stronger demand for government securities and market expectations of further easing in monetary conditions.
Although the Central Bank has streamlined its approach by adopting a single policy rate, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will remain in place for overnight transactions, albeit no longer as primary policy rates.
These rates will now be linked to the OPR, with the SDFR set at 7.50 per cent and the SLFR at 8.50 per cent, establishing a narrow 50-basis-point band for overnight borrowing and lending transactions.
The broader economic context for this policy adjustment reflects improved conditions in Sri Lanka’s external sector, with foreign currency reserves now at US $6.5 billion, providing a stronger buffer to support monetary policy easing.
The Central Bank has revised its growth forecast for 2024, now expecting the economy to expand by 4.5 to 5.0 per cent, a higher figure than initially anticipated, largely driven by stronger external trade and a gradual recovery in key sectors.
