CBSL Keeps Interest Rate at 7.75%: A Careful Move for Growth and Inflation
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| Source - Ada Derana |
So why did CBSL not cut rates?
It does not appear that CBSL is doing anything at a glance. Retaining the rate, however, is not a thoughtless thing to do.
The rise in prices (inflation) has been very low. Actually, there was even a time when prices declined. Colombo consumer price index reflected a further easing of deflation. Inflation is now projected to gradually rise and attain the figure of about 5 per cent, which is the target of the Central Bank. This is considered to be a healthy amount, neither too high nor too low.
By reducing the interest rates once more, so as to continue with its policy of monetary easing, CBSL could have caused inflation to move at an accelerated rate. This may have an effect of weakening the rupee, causing a run out of foreign currency or difficulty in servicing foreign debt.
Therefore, CBSL is not trying to get us to speedy growth; rather, it is trying to achieve stable/slow growth.
What is the state of the Economy?
This is a good indicator because the economy expanded to the tune of 4.8% in the first quarter of the year 2025.
Credit in the private sector is on the increase - that is, more loans are being advanced by the banks to the business and individual groups. The market interest rates have also reduced, allowing people to borrow more.
All these demonstrate the fact that the economy is picking up pace, yet it must be directed.
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| Source - Google |
Slowly, the prices will increase in the coming few months. It may raise the prices of groceries, fuel as well and transport costs, but not drastically.
This is what the Central Bank wishes. It expects to keep money circulating by abandoning deflation, which harms the economy by reducing people's spending.
But the Bank is cautious. It does not desire inflation to get out of control.
The situation in Sri Lanka with the steadiness of foreign reserves is maintained at a steady level, with an increase of the trade deficit. There is an increasing tourist business and a large population of Sri Lankans in their foreign work, who remit funds to their country. The IM has also issued the fifth tranche of its program of loans that helps out the country.
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| Source - Google |
CBSL continues purchasing foreign exchange to enable the accumulation of reserves in order to procure long-run stability.
CBSL is conveying a strong word: We are not panicking. We control, we have control.” When it does it too fast, such as reducing the rates earlier than appropriate, it would be problematic. Remaining at one place is also an indication that one has confidence in the economy.
This is what the Bank anticipates next:
There will be a gradual increase in prices, especially of necessities.
The loans can also be accessed at a more comfortable rate to enable the growth of the business.
The rupee might come under pressure in cases of worsening global conditions.
The investors might feel more assured or get stability in policy.
This could still be changed according to the behaviour of inflation.
Final Thoughts
The move is not just about changes in rates. It reveals the direction that the economy will take. CBSL desires the economy to remain hot but not very hot.
They are opting to exercise patience rather than doing what amounts to panic or allowing what seems like a quick win. It is walking the thin line, and so far, they appear to be making it work.
Is keeping the rate unchanged a correct decision by CBSL? Comment and tell us.
Written By - Hirushan Godagama
Original Article - “Sri Lanka central bank keeps policy rate at 7.75%, says will push up cost of living and growth”
Publication Date - 23/07/2025
Source - economynext
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