Central Bank retains current policy rates to stabilise inflation
The Central Bank (CB) has retained the current Overnight Policy Rate (OPR) at 8 per cent after considering domestic and external macroeconomic trends. This monetary policy decision was taken with the objective of fixing inflation at 5 per cent over the medium term and supporting economic growth.
The economy expanded by about 5 per cent in 2024 against the CB and International Monetary Fund estimates. This was the first time Sri Lanka experienced positive economic growth since 2019, reflecting its recovery from previous fiscal crises.
At a post-policy meeting media briefing on January 9, CB Governor Nandalal Weerasinghe attributed the sharp decline in inflation to administrative reductions in electricity tariffs, particularly following an additional cut in January 2025. He noted that inflation has remained negative for four consecutive months, primarily due to these adjustments in energy prices and subdued consumer demand.
Governor Weerasinghe projected that inflation would remain in negative territory in the near term but is expected to align with the 5 per cent target by the latter half of 2025. He emphasised that current deflationary trends are temporary and largely a result of government-controlled energy pricing policies rather than underlying economic weaknesses.
On the rupee fluctuations, he pointed out that strong economies, such as India and China, have experienced currency depreciations despite maintaining substantial foreign exchange reserves. He emphasised that exchange rate movements in a properly functioning market-driven system are natural and do not necessarily signal economic distress.
In terms of domestic lending, Sri Lanka’s private sector credit has not reached excessive levels of growth, although December 2024 saw a notable one-time surge. CB data revealed that private sector credit expansion hit a 32-month high of Rs.193 billion, with a 27-month peak in year-on-year growth at 10.7 per cent. This robust credit expansion aligns with signs of economic recovery from one of Sri Lanka’s worst financial crises.
Overall, while challenges persist, Sri Lanka’s economic indicators suggest a trajectory of gradual improvement. The CB remains focused on balancing inflation control with economic growth, ensuring that policies support long-term financial stability and resilience.
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