(Bloomberg) -- Sri Lanka’s central bank set its new single benchmark interest rate at 8% to bolster the economy’s recovery from the worst crisis in decades.
The change to a new benchmark means the effective reduction in the policy interest rate would be around 50 basis points, the central bank said in a statement on Wednesday.
The decision to ease monetary policy is to “ensure that inflation treads towards the inflation target of 5%, while supporting the economy to reach its full capacity,” the central bank said.
Sri Lanka has a sufficiently balanced monetary policy now, Governor Nandalal Weerasinghe said in an interview with Bloomberg TV’s Haslinda Amin on Wednesday. The central bank sees “no significant risk” to reaching its inflation goal, Weerasinghe said.
Sri Lanka has undershot this inflation target since March, recording deflation from September.
The Central Bank of Sri Lanka said Tuesday that it is introducing the overnight policy rate as its primary tool to “signal and operationalize its monetary policy stance.” The benchmark rate replaces a system of two gauges under which the monetary authority slashed rates by 725 basis points since an easing cycle that started in April 2023.
The International Monetary Fund, which has a loan program with the country, had recommended a move to a single benchmark to improve policy transmission. Last week, Sri Lanka secured initial approval for a $333 million tranche out of a $3 billion IMF bailout. The funds from the multilateral lender have helped stabilize Sri Lanka’s economy and boosted activity.
The benchmark Colombo All-Share Index slipped 0.1% to 12,957.50 at 10:12 a.m. local time. The Sri Lankan rupee was little changed at 291 per dollar.
What Bloomberg Economics Says
The Central Bank of Sri Lanka’s decision to ease rates followed immediately its announcement on the adoption of a single policy rate. Together, the pair of actions should help improve the transmission of monetary easing, helping boost demand which is being damped by high real interest rates and a tight fiscal policy.
Ankur Shukla, South Asia economist
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The nation is starting to emerge from an unprecedented economic crisis and debt default in 2022. The economy grew faster than expected in the second quarter and is now under the control of newly-elected, leftist president Anura Kumara Dissanayake.
His National People’s Power bloc won a historic supermajority in a Nov. 14 parliamentary vote on a platform to combat corruption and ease the economic burden on the people.
--With assistance from Shwetha Sunil, Haslinda Amin and Karl Lester M. Yap.
(Updates with governor’s comments in BTV interview in fourth paragraph)
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