Current deflation situation would not adversely impact economy – CBSL Governor

By Hirna H. Senewiratne

The current deflation situation will not adversely affect the economy and is a correction from the previous very high inflation, Central Bank Governor Dr.Nandalal Weerasinghe said.

“The deflation expected to be witnessed by the end of the second quarter in 2025, will reduce the cost of living for the people and also the cost of production of companies. Further, it comes after very high inflation, Governor Weerasinghe said yesterday at the CBSL’s monthly monetary policy review meeting held at the Central Bank head office in Colombo.

He said that Sri Lanka’s deflation is expected to continue in the near term, but the economy has been recovering and the economy is growing around 4.5 percent to 5 percent, amid the price falls, Governor Weerasinghe said.

Dr. Weerasinghe added: “The notion that the country will be in crisis once it starts repaying the loan is erroneous. If Sri Lanka continues on the current economic path, a crisis can be averted.

“The CBSL has decided to implement a single policy interest rate mechanism, transitioning from its dual policy interest rate mechanism, effective from November 27, 2024.

“A single policy interest rate mechanism was announced in the Central Bank’s Annual Policy Statement in January 2024 and the subsequent announcement in September 2024.

“Accordingly, we have introduced the Overnight Policy Rate (OPR), as our primary monetary policy tool to signal and operationalise our monetary policy stance.

“The OPR will be periodically reviewed and adjusted as needed by the Central Bank to indicate and communicate a change in its monetary policy stance.

“This transition is expected to enhance the efficiency and effectiveness of monetary policy, signaling a transmission to the financial markets and the broader economy.

“With this change, the Central Bank will target to maintain the average weighted call money rate (AWCMR), the rate at which banks transact with each other in the interbank market, at or around the announced OPR. AWCMR will remain the operating target of the Central Bank under its FIT framework.”