In consideration of the current and expected macroeconomic developments highlighted above, the Monetary Policy Board of the Central Bank of Sri Lanka, at its meeting held on 25 March 2024, decided to reduce the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 bps to 8.50 per cent and 9.50 per cent, respectively.
The Board viewed that the reasons for the recent and expected changes in inflation in the upcoming months were propelled by supply-driven and administratively determined prices, while noting that inflation expectations remained well anchored. The Board was of the view that a further easing of monetary policy would provide the required space for market interest rates, particularly lending rates, to adjust downwards further to levels conducive to continued expansion of credit to the private sector, thus supporting the ongoing revival of economic activity.
In addition, the Monetary Policy Board was of the view that the MLA Order No. 01 of 2023 on Maximum Interest Rates on Rupee Denominated Lending Products issued in August 2023 contributed to reducing the overall market lending interest rates and therefore yielded the expected results. Given that the limits specified in the said Order are no longer relevant in the context of further monetary policy easing since its implementation, and with a view to moving away from administrative measures towards market-based instruments as the economy normalises, the Board decided to repeal the Monetary Law Act Order No. 1 of 2023 with immediate effect.
Lastly, the Board noted the improvements in domestic money market activity alongside the improvement in liquidity conditions and decided to remove the remaining restrictions on the usage of the Standing Deposit Facility (SDF) of the Central Bank with effect from 01 April 2024. This would further support market-based transmission of monetary policy adjustments. The Board stressed the need for all financial institutions to take swift measures to reduce market lending interest rates to ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households.
In arriving at this decision, the Board took note of, among others, subdued aggregate demand conditions, the lesser-than-expected impact of the recent changes to the tax structure on inflation, favourable near-term inflation dynamics due to the recent adjustment 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 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 normalisation of market interest rates in the period ahead.
