By Economic Climate and Central Bank Decision to Hold Interest Rates
Overview of the Economic Climate
Sri Lanka’s economy has shown strong signs of recovery, with GDP growth recorded at 5.5% in Q3 2024, following 4.7% growth in Q2 2024. Economic activity has been supported by lower interest rates, increased private sector credit, and improved market confidence. Despite a widening merchandise trade deficit due to higher import expenditures, the external sector has remained stable, aided by improved tourism revenue and worker remittances. The Sri Lankan rupee, which appreciated by 10.7% in 2024, has seen a slight depreciation of 2.0% in early 2025.
Inflation and Deflation Trends
Headline inflation has remained negative for the fourth consecutive month as of December 2024, mainly due to reduced electricity tariffs and domestic fuel prices. The Central Bank projects inflation to stay negative in the short term but expects it to turn positive from mid-2025, gradually converging towards the 5% target over the medium term. Core inflation is also expected to decline further before stabilizing.
Monetary Policy Decision
Considering these economic conditions, the Monetary Policy Board of the Central Bank of Sri Lanka decided to maintain the Overnight Policy Rate (OPR) at 8.00%. The decision reflects a careful balance between sustaining economic growth and ensuring inflation remains within target levels. The Board highlighted that the ongoing deflation is largely due to administrative energy price adjustments and expects inflation to normalize in the latter half of 2025.
Impact of the Decision
Interest Rates: Market lending rates have continued to decline, supporting economic recovery and private sector credit expansion.
Private Sector Growth: Credit growth surged in December 2024, indicating improved lending conditions and business confidence.
External Stability: With a stable foreign reserve position of $6.1 billion and a completed external debt restructuring process, Sri Lanka’s external outlook remains strong.
Maintain Price Stability
The Central Bank’s decision to hold interest rates at 8.0% aligns with its strategy to maintain price stability while fostering economic recovery. With inflation expected to rise towards the target by mid-2025, the Bank will continue monitoring economic developments to ensure a stable and sustainable growth trajectory.
