Sri Lanka keeps policy rate unchanged at 8.75% amid inflation and global risks

Sri Lanka
By Editor_1

COLOMBO – Sri Lanka’s Monetary Policy Board has kept the Overnight Policy Rate (OPR) unchanged at 8.75%, citing elevated inflation, stronger domestic demand and continued uncertainty in the global economy despite easing external pressures.

The decision was taken at the Board’s meeting on Tuesday (21) following an assessment of domestic and international economic conditions, the Central Bank of Sri Lanka (CBSL) said in a statement.

It noted that renewed tensions in the Middle East had driven up global commodity prices, particularly crude oil, posing risks to global economic growth and creating potential spillover effects for Sri Lanka through higher import costs and other external channels.

Headline inflation accelerated to 6.8% year-on-year in June, largely due to increases in domestic energy and food prices. The CBSL said inflation is expected to remain above its 5% target in the near term before gradually easing towards the target, while core inflation is also expected to rise and stabilise around that level.

Despite the recent increase in inflation, it said medium-term inflation expectations remain well anchored, noting that while current price pressures are primarily supply-driven, domestic demand has also strengthened.

The CBSL said the monetary policy tightening implemented in May, together with complementary fiscal and administrative measures introduced by the government, is expected to gradually moderate private sector credit growth and ease demand-side inflationary pressures.

On the external front, the Bank said pressures arising from the Middle East conflict had eased somewhat, although the outlook remains uncertain amid renewed geopolitical tensions.

Since April, Sri Lanka’s current account has recorded a deficit as higher fuel import costs widened the merchandise trade gap and tourism earnings slowed. However, the CBSL said recent policy measures are expected to curb import demand, including imports of motor vehicles.

Workers’ remittances have remained resilient throughout 2026, while the country’s gross official reserves stood at US$6.45 billion at the end of June despite continued foreign debt servicing obligations.

The Central Bank also noted that the Sri Lankan rupee has stabilized in recent weeks, reflecting the impact of measures implemented to support external sector stability.

The CBSL said it would continue to closely monitor domestic and global economic developments and stands ready to take further policy action, if necessary, to ensure inflation returns to and remains around the 5% target, while supporting sustainable economic growth over the medium term.

The Central Bank said its next scheduled monetary policy announcement will be released on Sept. 30, 2026.

-ENCL

Editor_1
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