CB to anchor inflation at 5% for sustained growth

• Notes temporary period of deflation is expected to provide some respite to public by dampening cost of living to some extent

With normalcy and stability being somewhat restored after years of pain, the Central Bank’s focus going forward will be on stabilising inflation around the target of 5 percent, consistent with the FIT framework. 

This is while ensuring that the economy remains on track towards achieving sustained growth over the medium term, thereby ensuring the prosperity of the nation, Dr. Weerasinghe said.

The deflationary environment, resulting from the one-off effects of the supply-side price adjustments, will continue in early 2025, as per the current projections of the Central Bank. 

However, inflation is projected to converge to the target during the latter half of the year, with the dissipation of the effects of such supply-side factors and accommodative conditions created by the relaxed monetary policy.  Until then, the Central Bank would continue to submit comprehensive reports to Parliament, as required under the Central Bank of Sri Lanka Act, providing reasoning for missing the inflation target, despite it being on the downside, with the aim of ensuring transparency and accountability of the actions of the Central Bank, Dr. Weerasinghe said. Following the high inflation episode from late 2021 to early 2023, the temporary period of deflation is expected to provide some respite to the public, by dampening the cost of living to some extent.

Throughout 2024, inflation declined steadily and eventually reached deflationary levels towards the latter part of the year. There was a temporary acceleration in headline inflation in early 2024, due to the increase in the Value Added Tax (VAT) and removal of the VAT exemptions from several items in the consumer basket. 

However, inflation decelerated thereafter, reaching levels below the target of 5 percent, driven by the higher-than-predicted downward revisions to the energy prices, stronger currency as well as the decline in food prices. In September 2024, headline inflation reached deflationary levels for the first time in nine years. Meanwhile, core inflation, which mainly reflects the demand pressures in the economy, also reached lower positive levels.