Thursday Jan 30, 2025
Thursday Jan 30, 2025
Thursday, 30 January 2025 00:00 - - {{hitsCtrl.values.hits}}
CBSL Governor
Dr. Nandalal Weerasinghe
By Charumini de Silva
The Monetary Board of the Central Bank of Sri Lanka (CBSL) has decided to maintain the Overnight Policy Rate (OPR) at 8% in its first Monetary Policy Review for 2025 held on Tuesday (28), aiming to support economic recovery whilst keeping inflation in check.
“The Board arrived at this decision following a careful analysis of the current and expected macroeconomic developments on the domestic and global fronts. This decision was made with a medium-term view of ensuring that inflation converges to the target of 5%, while supporting the economy to reach its potential,” the CBSL noted in a statement.
Addressing the post-monetary policy meeting media briefing yesterday, CBSL Governor Dr. Nandalal Weerasinghe acknowledged that inflation fell sharply than anticipated, particularly after a further electricity tariff cut in January 2025 beyond its control.
“We expect inflation to turn positive from Q3 of 2025 and stabilise at 5% in the medium term,” he added.
The CBSL highlighted signs of robust economic growth that is likely to have continued, resulting in higher growth for 2024 than initially projected. As per GDP estimates published by the Department of Census and Statistics (DCS), the economy is estimated to have grown by 5.5% year-on-year (YoY) in Q3 2024, following an expansion of 4.7% YoY recorded in Q2 2024.
“Annual GDP growth is projected to be around 5% in 2025,” Dr. Weerasinghe said.
He also opined that the economy is expected to normalise within the next 8-9 months alongside the economic recovery.
“The OPR is now aligned with market interest rates, which in turn are stabilising across short and long-term lending benchmarks,” he added.
With further easing of monetary policy during the last Monetary Policy Review, the short-term money market interest rates adjusted downward, while the Average Weighted Call Money Rate (AWCMR) remained aligned with the OPR. Market lending and deposit interest rates also continued to decline, reflecting the accommodative monetary policy stance. Supported by lower market lending interest rates and reflecting the recovery in economic activity, the growth of credit extended to the private sector by Licenced Commercial Banks (LCBs) continued to accelerate.
The CBSL stated that the growth momentum of credit to the private sector is expected to continue, with an expansion of Rs. 790 billion registered in 2024.
“There are no signs of overheating in private sector credit growth yet, despite a ‘one-off’ surge in December,” he pointed out.
In December 2024 alone, private sector credit rose to Rs. 193.2 billion, marking a 10.7% YoY increase.
The Governor explained that December typically sees a higher credit cap due to ‘seasonal factors’. “The sharp rise in December credit growth is largely seasonal. However, if this trend persists, we need to remain cautious,” he added.
He also stressed the importance of monitoring credit expansion to assess potential overheating in the economy, noting that it is still too early to make a definitive judgement.
“If credit growth exceeds expectations, it could indicate rising demand beyond anticipated levels. Although we do not see that happening yet, we need to track data from January to March to determine if credit growth is accelerating,” he elaborated.
Meanwhile, the CBSL noted that the yields on Government securities continued to decline, reflecting improved fiscal performance and reduced sovereign risk premia.
The external sector remained robust. The merchandise trade deficit widened during 2024 compared to the previous year, due to a larger expansion in import expenditure relative to export earnings. However, improvements in earnings from tourism and workers’ remittances contributed positively to the external current account during this period.
Following an appreciation of 10.7% in 2024, the Sri Lanka Rupee recorded a year-to-date (YTD) depreciation of around 2% against the US Dollar thus far in 2025. The external debt restructuring process, except for a small portion, was completed successfully in December 2024, strengthening the external sector outlook of the country.
The statement added that Gross Official Reserves (GOR) stood at $ 6.1 billion at end 2024. This includes the Bilateral Currency Swap facility from the People’s Bank of China, which was renewed for a further period of three years in December 2024.
