The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has actually chosen to implement a single policy rates of interest system, the Overnight Policy Rate (OPR), transitioning from its double policy interest rate mechanism with effect from today (27 November).
This has been introduced as revealed in the Central Banks Annual Policy Statement in January 2024 and the subsequent announcement in September 2024 of the prepared application of the single policy rate of interest mechanism.This marks another substantial improvement in the Flexible Inflation Targeting (FIT) framework carried out by the Central Bank, the reserve bank said.The statement even more stated: Accordingly, the Central Bank presents the Overnight Policy Rate (OPR), as its primary monetary policy tool to signal and operationalise its monetary policy stance.The OPR will be regularly examined and adjusted as needed by the Central Bank to indicate and communicate a change in its monetary policy stance.
This transition is expected to improve the efficiency and efficiency of monetary policy signalling and transmission to the financial markets and the more comprehensive economy.With this modification, the Central Bank will target to maintain the typical weighted call money rate (AWCMR), the rate at which banks negotiate with each other in the interbank market, at or around the revealed OPR.
AWCMR will remain the operating target of the Central Bank under its FIT framework.The standing facilities, particularly the Standing Deposit Facility and the Standing Lending Facility will continue to be readily available to participatory organizations for overnight deals with the Central Bank.The relevant rates for these centers, particularly the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) will be linked to the OPR, with pre-determined margins as chosen by the Central Bank.SDFR and SLFR will continue to provide the lower bound and upper bound, respectively, for interbank call cash rates.With this shift to the single policy interest rate mechanism, SDFR and SLFR will no longer be considered policy rate of interest of the Central Bank.The Central Banks monetary policy is guided by the FIT structure, which aims to keep heading inflation at the target rate of 5 percent, while fostering financial growth to reach its capacity.