Sri Lanka Streamlines Monetary Policy to Single Benchmark Rate

(Bloomberg) -- Sri Lanka’s central bank said it will start using a single benchmark interest rate to manage monetary policy, starting from its next update on Wednesday, replacing its current system of two rates. 

The Central Bank of Sri Lanka said in a statement Tuesday that its introducing the Overnight Policy Rate as its primary tool to “signal and operationalize its monetary policy stance.” 

“This marks another significant improvement in the flexible inflation targeting framework implemented by the central bank,” it said in the statement. “This transition is expected to enhance the efficiency and effectiveness of monetary policy signaling and transmission to the financial markets and the broader economy.”

The central bank has been employing two benchmark rates. One is the standing lending facility, which is the maximum it charges to inject overnight liquidity into the banking system. The second is the standing deposit facility, which is the minimum it paid to adsorb excess liquidity overnight. At the last policy review Sept. 27, they were left unchanged at 9.25% and 8.25%, respectively. 

A mid-corridor may be ideal as a policy rate and would improve the central bank’s ability to steer market rates toward a desired level, Ankur Shukla of Bloomberg Economics wrote in a report earlier this month. 

The International Monetary Fund, which has a loan program with the country, has recommended that the South Asian island move to a single benchmark to improve policy transmission. 

Last week, Sri Lanka secured initial approval for a $333 million tranche out of a $3 billion IMF bailout. The funds from the multilateral lender have helped stabilize Sri Lanka’s economy and boosted activity. 

The central bank added in its statement Tuesday that it will maintain its so-called flexible inflation target, which aims for a headline figure of 5%. 

The central bank will announce the new single rate Wednesday at 7:30 a.m. in Colombo.

--With assistance from Asantha Sirimanne and Vrishti Beniwal.

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