A deflationary environment in Sri Lanka is expected to continue in early 2025, according to the central bank governor, highlighting a change in scenario for the South Asian nation that had struggled with high prices during an unprecedented economic crisis. 

The country’s inflation is projected to converge to the target level of 5 per cent during the second half of the year, as economic activity picks up with relaxed monetary policy conditions, Central Bank of Sri Lanka Governor Nandalal Weerasinghe said in the monetary policy roadmap on Wednesday. 

“We believe this temporary period of deflation could provide some respite to the general public by damping or managing the cost of living,” that had been driven up in the past, Weerasinghe said. Sri Lanka has undershot its inflation target since March and recorded deflation from September. 

In the meantime, the central bank will “maneuver interest rates to ensure that inflation is kept low and stable with the view to promote overall public welfare,” Weerasinghe said.

The Central Bank of Sri Lanka in November set its new single benchmark interest rate at 8%, replacing an earlier system of two gauges under which the monetary authority slashed rates by 725 basis points since an easing cycle that started in April 2023.

Weerasinghe said the country’s economic growth in 2024 is expected at 5 per cent. Sri Lanka’s economy grew 5.5% in the third quarter, after expanding 4.7 per cent in the April-June period.  

Sri Lanka has lately managed to find some balance after suffering an economic meltdown in 2022. Funds from the International Monetary Fund have helped stabilize the island nation’s economy and conclusion of its $12.6 billion debt restructuring will ensure further aid keeps flowing. 

On Dec. 23, Moody’s Ratings upgraded Sri Lanka’s credit rating, following a similar move by Fitch, noting the nation’s reduced external vulnerability and liquidity risk.

“The central bank will continue to ensure price stability, safeguard financial stability and support the economy to reach its potential” Weerasinghe said. “Achieving long-term stability requires the commitment to pursue necessary economic reforms.”

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