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2025-09-12 19:08:05
Sri Lanka's Monetary Policy: A Dual Consideration of Prudent Interest Rate Raises and Reserves] ⑴ The Governor of the Central Bank of Sri Lanka stated that while the central bank has room to cut interest rates further, it will adopt a cautious approach to maintain buffers against potential external shocks. This follows the central bank's unexpected 25 basis point cut in the overnight policy rate to 7.75% in May, a move that has been effectively transmitted to the market. ⑵ After a sharp contraction in 2022 and 2023, Sri Lanka's economy is currently stabilizing. Inflation has eased, foreign exchange reserves have improved, and the currency has strengthened, allowing the central bank to shift from crisis management to a more balanced monetary policy stance. ⑶ The Governor emphasized that while monetary policy can provide support in the short term, it is not a driver of sustainable growth. He pointed out that the central bank cannot support growth through credit expansion or excessively accommodative monetary policy, which is only short-term and not sustainable. ⑷ Looking ahead to the next decade, Sri Lanka's average annual external debt will be approximately US$3.5 billion to US$4 billion. If foreign exchange reserves can be maintained at or above US$8 billion, it will be more stable and resilient than during the crisis. Current reserves are US$6.2 billion. (5) The central bank governor stated that current data shows that the economy is recovering steadily and the outlook remains optimistic. Sustainable growth requires stability, and short-term higher growth is not sustainable.
