Sri Lanka continues current interest rate policy, halts rate cuts
Governor of the Central Bank, Nandalal Weerasinghe has reaffirmed the country’s stance on the IMF programme being implemented and debt re-profiling.
On Wednesday, he spoke at the latest monetary policy review press conference in Colombo, ruling out any short-term reduction in the monetary policy interest rate or efforts to raise funds from international markets in the next two years.
Even though Sri Lanka has been facing deflation since September 2024, the Central Bank has maintained the Overnight Policy Rate (OPR) at 8 per cent since November.
The Bank targets a 5 per cent inflation rate, whereas the current policy rate would offer a 3 per cent real interest rate. Dr. Weerasinghe attributed the recent deflation as having been caused by temporary factors, primarily drops in electricity prices, and emphasised again that inflation would stabilise in the third and fourth quarters of 2025.
Dr. Weerasinghe allayed concerns on the upcoming IMF review, referencing favourable reactions from the international lender during the briefing.
He stated that the IMF was satisfied with Sri Lanka’s performance, according to sound board reviews and comments. The Governor stressed the importance of practicing fiscal discipline, implementing governance reforms, and adhering to revenue-based fiscal consolidation in order to meet the IMF’s objectives.
Debt restructuring, he further stated, made tremendous progress, particularly on euro bonds and bilaterals with big creditor nations.
“We have completed restructuring euro bonds, and the new instruments are performing well in the market. Simultaneously, we are finalising with India, China, and Paris Club members,” he said. Japan has already completed its restructuring deal, and the same is ongoing with other countries.
Dr. Weerasinghe was optimistic of the government’s determination towards such economic reforms and restructuring measures, and he was certain they would further make Sri Lanka financially stable. He ensured the culmination of bilateral arrangements would go as planned, placing the nation on track for economic restoration.
In terms of Sri Lanka’s future ability to access overseas markets, Dr. Weerasinghe indicated that it would take two years for the country to recapture a B-grade credit rating that would facilitate market entry.
But he cautioned that commercial lending would be subject to the whims of government choices. He explained that Sri Lanka today is accessing multilateral funds and prudent book management to reduce the budget deficit, reducing the pressure for short-term commercial loans. Besides, Sri Lanka is experimenting with alternative funding methods such as debt-for-nature swaps.
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