• Standing Lending and Deposit Facility rates brought to 9.25% and 8.25%
• Move largely symbolic, given miniature nature of cut to reinforce easing path 
• Central Bank has delivered a cumulative 750-basis-point cuts since it pivoted to relax monetary policy in June 2023

The Central Bank trimmed the policy rates by 0.25 percentage points. While the decision caught some sections of the economy off guard, others were not surprised. 

The financial sector regulator was not entirely satisfied with the way the banks had reacted to the earlier rate cuts and is of the view that the risks related to the price changes are currently balanced.

The Central Bank cut its Standing Lending and Deposit Facility rates by 25 basis points each, bringing the two benchmark rates to 9.25 percent and 8.25 percent, respectively.

The move was largely symbolic and lacked much significance, except for the need to signal that the Central Bank is on the easing path.

The move will also induce pressure on the banks to cut their lending rates further, as they appear to be taking longer than it requires to pass down the full benefit of the lower policy rates.

With this week’s policy rate cut, the Central Bank has now delivered a cumulative 750-basis-point cuts since it pivoted to relax the monetary policy in June last year.  

“In arriving at this decision, the Board considered the need to signal the continuation of the eased monetary policy stance, thereby inducing a further reduction in market lending rates to support economic activity, amidst a benign inflation outlook,” the Central Bank said in the policy statement.

In making the rate move, the Central Bank was least worried about inflation, as it does not see significant upside risks to the prices in the medium term, which could surpass its mid-term target of maintaining headline inflation at 5 percent.

The officials took time during their press briefing to dispel any concerns over price pressures and said both risks to upside and downside to prices appear in control and balanced.

The prices measured by the Colombo Consumer Price Index, the mostly watched price gauge for inflation, came in at 1.7 percent for June from a year ago.

Although the prices could accelerate in the coming months, due to the dissipation of the favourable base effects, the downside risks to the prices coming from the lower energy prices and recent sizable downward revision in electricity tariffs could offset any undue increase in prices.

The move this week reflects that the monetary policy is more leaned towards supporting the growth in the economy than the price stability, which is already under control in the absence of exogenous events.