The Central Bank of Sri Lanka (CBSL) has announced the implementation of a single policy interest rate mechanism, known as the Overnight Policy Rate (OPR), effective today (27 November 2024). This marks a transition from the previous dual policy interest rate framework and is expected to provide greater flexibility in inflation targeting.
Streamlining Monetary Policy
As outlined in the Central Bank’s Annual Policy Statement in January 2024 and reaffirmed in September 2024, the move represents a significant enhancement to the Flexible Inflation Targeting (FIT) framework.
The Overnight Policy Rate (OPR) will now serve as the primary monetary policy tool, enabling the Central Bank to signal and operationalize its policy stance more effectively. The OPR will be reviewed and adjusted periodically to align with evolving economic conditions.
Benefits of the Transition
The adoption of the OPR is expected to:
- Improve efficiency in monetary policy signalling.
- Enhance the transmission of policy changes to financial markets and the broader economy.
- Strengthen the Central Bank’s ability to achieve its inflation and economic stability objectives.
This reform underscores the Central Bank’s commitment to modernizing its monetary policy tools for improved economic outcomes.
