Central Bank introduces the Overnight Policy Rate, eases its monetary policy stance

The Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on Tuesday decided to further ease the monetary policy stance and set the newly introduced Overnight Policy Rate (OPR) at 8 per cent.

With this change, the effective reduction in the policy interest rate would be around 50 basis points from the current level of the Average Weighted Call Money Rate (AWCMR), which continues to serve as the operating target of the Flexible Inflation Targeting (FIT) framework, the bank said in a media release.

The Board arrived at the decision to ease the monetary policy stance following a comprehensive assessment of current and expected domestic and international economic developments, including risks and uncertainties, to ensure that inflation treads towards the inflation target of 5 per cent, while supporting the economy to reach its full capacity.

In particular, with the latest available incoming data, the critical factors that convinced the Board to further ease monetary policy were the deeper-than-expected deflation conditions in the near term with further moderation of underlying inflationary pressures and inflation expectations, better-than-expected developments on the external front, and the lack of further space available for a reduction in market lending rates.

The Central Bank also moved to a single policy interest rate mechanism from its dual policy interest rate mechanism. Accordingly, the Overnight Policy Rate (OPR), set at 8 per cent, will serve as the primary monetary policy tool of the Central Bank to signal and operationalise its monetary policy stance henceforth. Moreover, with this transition to the single policy interest rate mechanism, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will no longer be considered policy interest rates of the Central Bank.