The Central Bank of Sri Lanka (CBSL) has introduced a single policy interest rate, the Overnight Policy Rate (OPR), set at 8.00 percent, marking an effective 50 basis-point reduction in the monetary policy stance.

The move replaces the dual policy rate structure and is expected to enhance the efficiency of monetary policy transmission by targeting the call money rate—the rate at which banks transact in the interbank market. This shift aims to align lending rates in the government securities market and the broader economy with the Central Bank's objectives, according to Governor Dr. Nandalal Weerasinghe.

Key Developments:

• Treasury bill yields dropped sharply following the announcement, with the one-year yield falling by 70bps to 9.08 percent.
• The Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) will continue for overnight transactions but are no longer policy rates. They are now linked to the OPR at 7.50 percent and 8.50 percent, respectively.

The decision comes due to deflationary conditions, which are expected to persist until mid-2025, before inflation gradually aligns with the Central Bank’s medium-term target of 5 percent.

The easing of monetary policy is anticipated to support economic recovery, with the Central Bank projecting growth of 4.5 to 5 percent in 2024, aided by improved external conditions and foreign reserves of $6.5 billion.

Since the start of its monetary easing cycle in June 2023, CBSL has implemented a cumulative 725bps reduction in rates. The latest measure is expected to further stimulate economic activity and ensure sustainable growth.