Central Bank stays pat on key policy rate as economic indicators move in right direction

Central Bank Governor Dr. Nandalal Weerasinghe gestures while addressing the Monetary Policy press conference yesterday
PIC BY PRADEEP PATHIRANA 

• Overnight Policy Rate left unchanged at 7.75%
• Says interest rate transmission happened as expected after May policy rate cut
• Monetary Policy Board does not see any build-up of undue demand pressures in economy
• Inflation moves according to projections and might settle below 5% mid-term target by year-end  

The Central Bank left its key policy rate unchanged at its fourth monetary policy announcement yesterday, as Governor Dr. Nandalal Weerasinghe said all macroeconomic indicators are moving in the right direction, capturing the sentiments of the Monetary Policy Board, which decided the current policy stance is just about at the right level to accomplish their mandate in maintaining price stability.  

The Central Bank left its Overnight Policy Rate at 7.75 percent, after it somewhat surprised the market with a 25-basis-point cut in May.

Dr. Weerasinghe said the previous policy rate cut achieved its desired goals, in both bringing down the lending rates in the economy while quickening the pace of consumer price growth, to help bring inflation to their 5.0 percent target.

“When we cut the policy rate in May, we wanted the market interest rates to come down further. That interest rate transmission has happened as expected from the last policy rate cut to this policy meeting,” Dr. Weerasinghe said addressing the post-meeting press conference yesterday.

Since the Central Bank first pivoted to monetary easing in June 2023, it has delivered a cumulative 8.00 percent worth of cuts thus far while the monthly prime lending rate – the rate at which the banks lend to their most prime customers – fell by a steeper 12.80 percent, while the weighted average new lending rate has come down by 11.83 percent through July 22, sharply easing the credit conditions.

Further in May, the licensed commercial banks gave a total private sector credit worth of Rs.132.9 billion, translating to a year-on-year growth of a robust 16.1 percent. This brought the cumulative private sector credit in the first five months to Rs.494.5 billion.

Asked if the current pace of credit growth would lead to overheating of the economy, Dr. Weerasinghe denied the possibility of such happening, as the current growth in private sector credit is taking place after a year of credit contraction in 2023, while there is a noticeable shift in credit from the state sector to the private sector, due to the improving financial conditions in the state-owned enterprises, due to cost reflective pricing.

On inflation, the Central Bank said although the headline inflation measured by the Colombo Consumer Price Index may not hit the 5.0 percent level by the end of the year, the prices are moving in line with the projections of the Central Bank and they would meet the target price level in 2026.

Speaking on the economic growth, Dr. Weerasinghe said growth is taking place quite robustly, as seen from the leading indicators such as the purchasing managers indices and expect the economy to deliver similar growth to that of the first quarter.

In the first quarter, Sri Lanka’s economy expanded by 4.8 percent, after a 5.0 percent growth in 2025.

“Things are moving in the right direction,” Dr. Weerasinghe said looking at the key economic indicators.

However, he said they would stay watchful of the developments that are taking place globally, such as the evolving tariffs by the United States and certain conflicts and their possible impact on the local economy, to take proactive measures to ensure inflation is stabilised around the target level while supporting the economy to reach its full potential. 

No plans to restrict vehicle imports

Central Bank Governor Dr. Nandalal Weerasinghe noted that there are no plans to reimpose restrictions on vehicle imports, assuring that the market would remain open.

Responding to a question during the monetary policy briefing, Dr. Weerasinghe said that neither the Central Bank nor the government has taken steps to curtail vehicle imports.

“As far as I’m aware, there is no such decision by the government. I believe the minister will make a statement confirming that there is no change,” he said.