Monetary Policy Review - No. 1 of 2025

Economic Research Department 29 January 2025 Monetary Policy Review: No. 01 – January 2025 The Central Bank of Sri Lanka maintains the Overnight Policy Rate (OPR)

projected earlier, has largely been an outcome of administratively determined energy price

reductions. This trend is expected to continue over the next few months before inflation begins

adjusting towards the targeted level in the second half of 2025.

Headline inflation is projected to remain negative in the near term, before converging to the target Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI), remained in the negative territory for the fourth consecutive month in December 2024. This was mainly driven by the previous downward revisions to electricity tariffs and domestic fuel prices, amidst subdued demand pressures. Latest projections indicate deeper deflation than previously projected, mainly due to the more than anticipated downward adjustment in the electricity tariff announced in January 2025. Inflation is expected to turn positive from mid-2025 and converge towards the targeted level of 5 per cent over the medium term, supported by appropriate policy adjustments.

Core inflation, which is currently in lower positive levels, is projected to decelerate further over the next few months, before adjusting upwards thereafter.

Headline Inflation Projections* (Quarterly, CCPI, Y-o-Y, %)

Based on the Projections during the January 2025 Monetary Policy Round

Realised Projection

22/IV 23/I II III IV 24/I II III IV 25/I II III IV 26/I II III IV

50% CI 70% CI 90% CI Realised Inflation

Source: Central Bank Staff Projections

* Realised data up to Q4 2022 shown in the fan chart are based on the CCPI (2013=100, seasonally adjusted), while data after this period are based on the CCPI (2021=100, seasonally adjusted).

Note: The fan chart illustrates the uncertainty surrounding the baseline projection path using confidence bands of gradually fading colours. The confidence intervals (CI) shown on the chart indicate the ranges of values within which inflation may fluctuate over the medium term. For example, the thick green shaded area represents the 50 per cent confidence interval, implying that there is a 50 per cent probability that the actual inflation outcome will be within this interval. The confidence bands show the increasing uncertainty in forecasting inflation over a longer horizon.

Note: A forecast is neither a promise nor a commitment.

The projections reflect the available data, assumptions, and judgements made at the forecast round in January 2025. They are conditional on the forecasts of global energy and food prices; the expected growth trajectory of Sri Lanka’s major trading partners; the anticipated domestic fiscal path in line with the IMF-EFF programme under the debt restructuring scenario; and global financial conditions implied by the monetary policy stance of the USA. Further, the projections are conditional on the model-consistent interest rate path and the resulting macroeconomic responses. Any notable change in these assumptions could lead to the realised inflation path deviating from the projected path.

Monetary — 1

Overnight Policy Rate (OPR) — 8.00%

Policy

INFORMATION NOTE: