Clarifying the Effective Reduction in the Policy Interest Rate (OPR): Around a 50 bps Adjustment!

As we all know, the Central Bank of Sri Lanka (CBSL) recently implemented a Single Policy Interest Rate - the Overnight Policy Rate (OPR), with AWCMR continuing to serve as the operating target. This transition, which was pre-announced before the end of the year, was predictable and part of the broader effort to streamline monetary policy signaling.

So, let’s break it down clearly:

• The primary goal of adopting the OPR is to signal CBSL’s monetary policy stance and guide the market. The OPR is set at 8.0%, which we expect AWCMR to align with, though slight deviations may occur due to factors like liquidity distribution, counterparty limits, and institutional appetite.
• Recently, AWCMR has been hovering around 8.5-8.6%, with 8.55% recorded just this Tuesday. Therefore, the effective adjustment in the policy rate is approximately 50 bps.
• Why isn’t it 75 bps or 125 bps? Because the AWCMR had already been adjusted down to around 8.5-8.6% prior to the move. While CBSL cannot directly set the interbank call money rate, its operations influence it, and that’s exactly what’s happening here.
• Furthermore, while SLFR might technically be the ultimate funding rate, its usage remains minimal given the current surplus liquidity in the system. This makes it less relevant as the primary funding rate for most banks at this point.

The key takeaway is that we’ve transitioned to a new mechanism, and it’s crucial for all stakeholders—including banks, participatory institutions (PIs), and/or financial institutions (FIs)—to begin from a shared understanding to avoid any confusion.

For more detailed information, I encourage all readers to refer to the following resources on;

1. The policy decision: Press Release
2. The transition to OPR: Press Release and Concept Note

Disclaimer: The views expressed in this short article are my own and do not necessarily reflect the official position or views of the Central Bank of Sri Lanka