CBSL reaffirms commitment to economic recovery

By Ifham Nizam

The Central Bank of Sri Lanka (CBSL) has reaffirmed its commitment to stabilizing inflation and supporting economic recovery through a carefully calibrated monetary policy stance. The February 2025 Monetary Policy Report (MPR) outlines key trends in inflation, interest rates and economic growth, offering insights into the nation’s financial future.

To enhance awareness on the report, the Bank hosted two discussions chaired by Assistant Governor Dr. Chandranath Amarasekere, with expert insights from the Director of the Economic Research Department, Directors of the Monetary Policy Committee and technical teams of the Economic Research Department.

The CBSL maintained its accommodative monetary policy throughout 2024, with a notable rate cut in November when it introduced a single policy rate mechanism—the Overnight Policy Rate (OPR)—set at 8.00%. This move effectively reduced interest rates by 50 basis points, a decision aimed at spurring economic activity while keeping inflation in check.

The monetary easing strategy aligns with the CBSL’s broader objective of anchoring inflation expectations, enhancing transparency and fostering financial market stability. As of January 2025, the OPR remains at 8.00%, signaling the bank’s confidence in its current approach.

Sri Lanka experienced deflation in the second half of 2024, driven largely by reduced electricity tariffs, lower fuel prices, and declining food costs. Since September 2024, headline inflation has remained in negative territory, reflecting a sharp drop in consumer price levels.

Looking ahead, the CBSL projects inflation to stabilize around 5% over the medium term. However, short-term risks remain. Inflation may temporarily exceed the target between late 2025 and mid-2026 before normalizing.

The report highlights several key risks to inflation:

Upside risks: Rising global food and energy prices, potential currency depreciation and unpredictable fiscal policies could push inflation higher.

Downside risks: Further price reductions in essential goods and energy could extend the deflationary trend.

The Sri Lankan economy is on a recovery path, albeit at a moderate pace. The CBSL acknowledges that the economy is operating below full capacity, with growth dependent on policy measures and external factors.

Key risks to growth include:

Labour shortages due to brain drain

Uncertain global economic conditions

Impact of climate change on agriculture

Conversely, debt restructuring and tourism recovery could provide much-needed economic momentum.

Despite statistical evidence of falling prices, many Sri Lankans do not feel a significant improvement in their cost of living. The report suggests this disconnect stems from:

Past inflation episodes, which have left prices elevated despite recent declines.

Income levels lagging behind inflation trends, reducing purchasing power.

Psychological and behavioral factors, where consumers may not perceive small price reductions as meaningful relief.

The CBSL’s focus remains on managing inflation expectations, ensuring financial stability, and supporting economic growth. While the current outlook suggests a gradual recovery, external shocks and domestic challenges could still pose risks.

As Sri Lanka navigates its economic future, policy consistency, fiscal discipline, and structural reforms will be critical in achieving long-term stability.

With inflation stabilizing and monetary policy remaining accommodative, the CBSL appears confident in its strategy. However, whether these measures translate into real economic relief for the public remains to be seen.