The Role of Average Weighted Call Money Rate in Shaping Monetary Policy Transmission Mechanisms and Inflation Outcomes in Sri Lanka

This study aims to analyse the role of the Average Weighted Call Money Rate (AWCMR) which is the operating target of the current monetary policy stance of the Central Bank of Sri Lanka (the CBSL) under the Flexible Inflation Targeting (FIT) framework and how the measures and policy actions taken by the CBSL effectively pass-through the market in order to achieve the final target of inflation control of the Sri Lankan economy. This study consists of both quantitative and qualitative methodologies to assess the influence of the AWCMR on key market interest rates and its subsequent impact on controlling inflation. The quantitative analysis focuses on the relationship between the AWCMR and a few key market interest rates, including government Treasury bill rates, Average Weighted Lending Rates, Average Weighted Deposit Rates, and Average Weighted Fixed Deposit Rates, using the monthly data from January 2018 to December 2023. Further, the qualitative analysis examines the CBSL’s dynamic monetary policy stance for inflation control and economic stabilisation, targeting the language and thematic content of CBSL communication to understand how such elements shape public expectations and institutional credibility. The findings of this study witnessed that the AWCMR acts as a crucial channel for the monetary policy transmission mechanism of the Sri Lankan economy and influences, in varying degrees, other market interest rates. Further, it emphasises the CBSL’s policy actions and timely measures positively yielded in shaping inflation during the study period. By combining both quantitative and qualitative approaches, this study provides a comprehensive analysis of the mechanisms through which the CBSL manages monetary policy and communicates with the public. In addition, this contributes to the prevailing literature by integrating qualitative views into the largely quantitative domain of monetary policy analysis.