Central Bank reduces policy rates by 0.25 percentage points

The Central Bank has announced a reduction in policy rates by 0.25 percentage points, surprising some sectors while others anticipated the move. 

The adjustment includes a 25-basis-point cut in both the Standing Lending Facility and Deposit Facility rates, bringing them to 9.25 percent and 8.25 percent, respectively.

This latest cut is seen as largely symbolic, primarily signaling the Central Bank’s commitment to easing monetary policy. It also aims to pressure banks into lowering their lending rates further, as they have been slow to fully pass on the benefits of previous rate cuts.

Since shifting to a more relaxed monetary policy in June last year, the Central Bank has now implemented a cumulative reduction of 750 basis points. The decision reflects a strategic move to support economic activity amid a stable inflation outlook.

In its policy statement, the Central Bank noted that the decision was driven by the need to signal the ongoing easing stance and encourage further reductions in market lending rates. The bank emphasized that inflation risks are currently balanced, with no significant upside risks expected to breach its mid-term target of 5 percent.

The Colombo Consumer Price Index, a key inflation measure, showed an annual increase of 1.7 percent for June. While prices may rise in the coming months due to the waning of favorable base effects, lower energy prices and recent cuts in electricity tariffs are likely to mitigate any potential inflationary pressures.

Overall, this rate cut indicates a shift towards supporting economic growth rather than focusing solely on price stability, which the Central Bank considers under control barring any unforeseen events.