In a significant step towards enhancing monetary policy efficiency, the Central Bank of Sri Lanka (CBSL) has declared its shift from a dual policy rate system to a streamlined single interest rate mechanism. Acknowledging the limitations of the existing approach utilizing both the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR), CBSL aims to consolidate its monetary policy operations under a unified benchmark rate.
This simplified framework is anticipated to enhance the transmission of monetary policy decisions, providing a more direct and predictable impact on borrowing and lending behaviours across the broader economy.
To complement this transition, CBSL will modernize its Open Market Operations (OMOs) by 2025. Implemented in phases, this user-friendly system aims to facilitate smoother execution of liquidity management efforts. Moreover, a transparent OMO auction schedule is set to launch in 2024, providing Participating Institutions (PIs) with advance notice of planned liquidity injections.
Recognizing the crucial role of accurate liquidity forecasting in the short-term interest rate and inflation management, CBSL has outlined plans to upgrade its forecasting framework in 2024. This enhanced system is designed to enable more precise predictions of the money market, allowing for fine-tuned adjustments in monetary policy measures and ensuring the Average Weighted Call Money Rate (AWCMR) remains within desired ranges.