Monetary Policy Review - No. 6 of 2024

The Board arrived at the decision to ease the monetary policy stance following a comprehensive assessment of current and expected domestic and international economic developments, including risks and uncertainties, to ensure that inflation treads towards the inflation target of 5 per cent, while supporting the economy to reach its full capacity. In particular, with the latest available incoming data, the critical factors that convinced the Board to further ease monetary

policy were the deflation conditions in the near term with further

moderation of underlying inflationary pressures and inflation expectations, better-than-expected

developments on the external front, and the lack of further space available for a reduction in market lending rates.

Introduction of Overnight Policy Rate (OPR)

will no longer be considered policy interest rates of the Central Bank.

For more details on this transition, refer the Press Release on “The Central Bank of Sri Lanka moves to a Single Policy Interest Rate Mechanism by Introducing the Overnight Policy Rate” and the underlying Concept Note, which can be accessed on https://www.cbsl.gov.lk/sites/default/files/concept_note_on_opr_e.pdf SDFR and SLFR, the rates applicable for standing facilities that will continue to be available for participatory institutions for overnight transactions with the Central Bank, are linked to the OPR with a margin of ± 50 basis points. Accordingly, SDFR and SLFR will be 7.50 per cent and 8.50 per cent, respectively.

Headline inflation is projected to remain negative in the near term Headline inflation, as measured by the year-on-year change in the Colombo Consumer Price Index (CCPI), which turned negative in September, remained in the negative territory in October 2024. This was driven by the previous downward revisions to electricity tariffs and domestic fuel prices, and the softening of volatile food prices, amid subdued demand pressures. Core inflation, Headline Inflation Projections*: (Quarterly, CCPI, Y-o-Y, %)

Based on the Projections during the November 2024 Monetary Policy Round

Realised Projection

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

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 Central Bank remains committed to communicating any changes to the inflation outlook to the public on a regular basis, enabling the public to make informed decisions.

economic conditions.

INFORMATION NOTE: