The Bank of Sierra Leone (BSL) has raised its interest rates for the tenth consecutive quarter, increasing from 23.25% to 24.25%. This marks the highest rate in over two decades as the Central Bank aims to curb inflation and address the structural factors driving it.
According
to Trading Economics, the benchmark interest rate in Sierra Leone averaged
18.81% from 2000 to 2024, peaking at an all-time high of 27.00% in October 2000
and dropping to a record low of 9.50% in March 2015. The monetary policy rate
(MPR) has been consistently raised since March 2022, culminating in a total
increase of 10 basis points by June 2024. Concurrently, the Standing Lending Facility
Rate (SLFR) was adjusted to 27.25%, and the Standing Deposit Facility Rate
(SDFR) to 17.75%.
The
SDFR represents the interest banks receive for overnight deposits with the
Central Bank. At the same time, the SLFR is the ceiling rate for the Central Bank’s overnight
liquidity injections into the banking system.
In its second-quarter Monetary Policy Statement, the BSL reported that the country’s inflation rate dropped to 35.84% in May 2024 from 38.06% in April. This marks a significant reduction of 18.75 percentage points since the recent peak in October 2023.
Despite this downward trend, policymakers cautioned that
elevated inflation risks persist due to global factors. They emphasized the need
for continuous monitoring of the domestic economy to ensure that inflation
expectations remain anchored.
The
Monetary Policy Committee (MPC) decided not to hold or cut the rate, despite
acknowledging the downward trend in headline inflation from November 2023 to
May 2024. They noted that the Central Bank’s tight monetary policy stance,
including measures to address foreign exchange market bottlenecks and
government fiscal consolidation efforts, has been effective.
The
MPC highlighted that, at 35.84% in May 2024, inflation remains significantly
high and above the medium-term target. After an extensive review of the
near-term inflation outlook, the MPC assessed the balance of risks as favoring
further monetary policy tightening. This decision aligns with the BSL’s
mandates of price stability and financial system stability while supporting
economic growth.
The
MPC also acknowledged the potential negative impact of a tight monetary policy
stance on investment and growth prospects. They emphasized the importance of
understanding the price-setting behavior of financial market participants and
the peculiarities of the monetary policy transmission mechanism to maintain the
current downward trajectory of inflation.
In summary, the Bank of Sierra Leone has increased its interest rates for the tenth consecutive quarter, raising them from 23.25% to 24.25%. This decision aims to curb inflation, which has seen a significant reduction from 38.06% in April 2024 to 35.84% in May 2024.
Despite the decrease, inflation remains high,
prompting the Monetary Policy Committee to continue its tight monetary policy
stance. The adjustments in the SLFR and SDFR reflect this strategy, aiming to
ensure price stability and financial system stability while supporting economic
growth.