The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has announced a reduction in the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 basis points (bps) each, setting them at 8.50 per cent and 9.50 per cent, respectively.
The decision, made during the Board’s meeting on 25th March 2024, follows a thorough evaluation of both domestic and international economic conditions. The move aims to uphold inflation at the targeted level of 5 per cent over the medium term while facilitating economic growth.
Explaining the decision-making process, the Board highlighted several factors, including subdued aggregate demand, the modest impact of recent tax changes on inflation, positive near-term inflation dynamics due to adjustments in electricity tariffs, stable inflation expectations, and manageable external sector pressures. Additionally, the Board emphasized the importance of continuing the downward trend in market interest rates.
Despite potential upside risks to inflation in the short term, the Board believes these won’t significantly alter the medium-term inflation outlook, given the expected prolonged period of subdued economic activity.
Furthermore, the Board stressed the necessity for financial institutions to swiftly and fully pass on the benefits of monetary easing measures to market interest rates, especially lending rates. This action is crucial for expediting the normalization of market interest rates in the foreseeable future.
Additionally, the Board noted improvements in domestic money market activity and liquidity conditions. As a result, it decided to lift the remaining restrictions on the usage of the Standing Deposit Facility (SDF) of the Central Bank, effective from 1st April 2024. This move is expected to further enhance the market-based transmission of monetary policy adjustments.
The Monetary Policy Board emphasized the importance of all financial institutions promptly reducing market lending interest rates. This action will ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households, fostering economic growth and stability.
