Sri Lanka's central bank surprises markets with a 50bps interest rate cut

March 26, 2024 (MLN):  In an unexpected move, the Central Bank of Sri Lanka, at its meeting held on March 25, 2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points (bps) to 8.50% and 9.50%, respectively.

The Board arrived at this decision following a comprehensive assessment of current and expected domestic and international economic developments, to maintain inflation at the targeted level of 5% over the medium term, while enabling the economy to reach its potential.

In arriving at this decision, the Board took note of, among others, subdued aggregate demand conditions, and the lesser-than-expected impact of the recent changes to the tax structure on inflation.

They also considered favorable near-term inflation dynamics due to recent adjustments to electricity tariffs, well-anchored inflation expectations, the absence of excessive external sector pressures, and the need to continue the downward trajectory in market interest rates.

The Board observed that the possible upside risks to inflation in the near term would not materially change the medium-term inflation outlook, as economic activity is projected to remain below par for an extended period.

The Monetary Policy Board underscored the need for a swift and full passthrough of monetary easing measures to market interest rates, particularly lending rates, by the financial institutions, thereby accelerating the normalization of market interest rates in the period ahead.

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