COLOMBO: Sri Lanka’s central bank held its overnight policy rate steady on Wednesday to underpin a stronger economic recovery as the country gradually pulls ahead from its worst financial crisis in decades.
The decision comes just days ahead of the new government’s first full-year budget due to be presented in Parliament next month.
The Central Bank of Sri Lanka (CBSL) moved to a single policy rate - the overnight policy rate which was set at 8% in November below previous benchmarks, shifting away from its dual policy rate regime of setting a Standing Deposit Facility Rate (SDFR) and a Standing Lending Facility Rate (SLFR).
The decision was largely in line with market expectations as 11 out of 13 analysts and economists polled by Reuters had predicted the monetary authority will maintain its policy stance due to benign inflation and stronger growth.
“This decision was made with a medium-term view of ensuring that inflation converges to the target of 5%, while supporting the economy to reach its potential,” CBSL said in its statement.
Sri Lanka central bank to focus on stronger crisis recovery in 2025
Sri Lanka’s economy crumpled under a severe foreign exchange crisis in 2022, but has made a faster-than-expected recovery after Colombo secured a $2.9 billion International Monetary Fund bailout programme in March 2023 and completed a $25 billion debt restructuring in December.
The current period of deflation, as projected earlier, has largely been an outcome of administratively determined energy price reductions, CBSL said.
“This trend is expected to continue over the next few months before inflation begins adjusting towards the targeted level in the second half of 2025,” it added.
The island nation is now targeting stronger growth in the current year after posting GDP growth of 5% in 2024, the highest in seven years, Governor P. Nandalal Weerasinghe said earlier this month.
“The economy and private sector credit is growing at a good pace so the central bank does not need to be too accommodative at this point,” said Udeeshan Jonas strategy head at Colombo-based equity research firm CAL.
The central bank will also keep close watch on the budget to be presented to parliament on Feb. 17, analysts said, which will be the first full-year budget under new President Anura Kumara Dissanayake after his government was elected in November.
Dissanayake, who is also the finance minister, has outlined plans to reduce income taxes, increase welfare and give relief to businesses.
However, he will have to balance fulfilling election promises with a key IMF target of posting a primary surplus of 2.3% of GDP in 2025 to remain within the four-year program.