Sri Lanka Has Room to Cut Rates if Growth Slows, CBSL Governor

COLOMBO (News 1st); Central Bank Governor Dr. Nandalal Weerasinghe says Sri Lanka’s inflation target remains around 5 percent, or slightly below, on a medium-to long-term basis, with inflation remaining stable on a forward-looking basis. He said the Central Bank’s policy stance is guided by forward-looking inflation and the output gap, comparing the economy’s potential with its actual growth.

According to him, current growth and the supply of credit to the economy are aligned with the Central Bank’s policy framework, which targets around 5 percent growth and maintains a real interest rate of about 2.75 percent. He said any economy that maintains real interest rates between 2 to 3 percent relative to inflation creates sufficient space and buffers to manage uncertainty.

Dr. Weerasinghe said the Central Bank has built 'multiple buffers' that provide policy flexibility. If the economy grows below potential, there is room to reduce interest rates to bring growth back in line, he said. Conversely, if the economy grows too rapidly, causing excessive demand through high credit growth or import expansion, the Central Bank has tools to respond, including interest rates and adjustments in the exchange rate. He said this flexibility is a key advantage of a flexible inflation-targeting regime, which allows the exchange rate to absorb external shocks while interest rates help manage domestic demand.