Sri Lanka central bank to consider a single policy rate mechanism

Nandalal Weerasinghe - Governor of the Central Bank of Sri Lanka

Nandalal Weerasinghe – Governor of the Central Bank of Sri Lanka. (Photographer: Buddhika Weerasinghe / Bloomberg via Getty Images)

Sri Lanka’s central bank is considering moving towards a single policy rate mechanism to ensure better signaling of its monetary policy stance, Governor P. Nandalal Weerasinghe said on Wednesday.

Weerasinghe made the comment while announcing the annual policy statement for 2024.

The central bank currently directs policy using two interest rates – the standing deposit facility rate and the standing lending facility rate. It is now considering focusing on one of those rates, he said.

The central bank has been mandated to maintain headline inflation at 5%, with a 2 percentage point leeway on either side, over the next three years, Weerasinghe said.

The average overnight call money rate is the operative target of the new monetary policy framework and no change in monetary policy is warranted at this point given inflation expectations remain well anchored, he said.

The Central Bank of Sri Lanka in November cut rates unexpectedly, taking total rate cuts since June to 650 basis points, and said it would suspend its monetary policy easing in the medium term.

Sri Lanka racked up record high inflation last year after its economy was pummelled by the worst financial crisis in decades.

Sri Lanka’s key inflation rate in December accelerated to 4% from 3.4% in November, latest data showed.

The central bank will reduce the total number of monetary policy meetings each year to six from eight and will publish its monetary policy report on a bi-annual basis to improve communication, the chief said.

While highlighting the key goals for the central bank, Weerasinghe said successful completion of the International Monetary Fund bailout programme and pushing forward with external debt restructuring will remain priorities.

Improving foreign exchange reserve buffers, diversifying the exports base, reducing external account deficits, sustaining the momentum of remittances and improving the island nation’s sovereign ratings were listed as other objectives.