The Monetary Policy Board, at its meeting held yesterday, decided to maintain the Overnight Policy Rate (OPR) at the current level of 7.75%. The Board arrived at this decision after carefully considering evolving developments and outlook on the domestic and global fronts, with particular attention to uncertainties arising from the ongoing Middle East conflict.
The sharp increase in global energy prices and trade disruptions amidst heightened uncertainty due to the escalation of geopolitical tensions necessitated a significant upward adjustment in domestic energy prices. The current low level of inflation, at 1.6% (y-o-y) in February 2026, relative to the target of 5%, provides sufficient space to accommodate the impact of higher energy prices and their spillovers on inflation. Given the latest available data and prevailing uncertainties, inflation is now expected to reach the target of 5% in Q2-2026, earlier than previously anticipated. Inflation is projected to remain around the target thereafter.
The economy recorded a strong real growth of 5.0% in 2025, despite the disruptions caused by Cyclone Ditwah towards the end of the year. Leading economic indicators point to a strong post-Cyclone recovery during early 2026. However, spillovers from the ongoing conflict could weigh on domestic economic activity in the period ahead, should the conflict be prolonged.
The external sector remained robust in the first two months of 2026, supported by stronger export earnings compared to imports, along with higher remittances and tourism earnings. Gross Official Reserves increased to USD 7.3 billion at the end of February 2026, and the Central Bank purchased a substantial amount of foreign exchange from the market in the first two months of the year. However, the ongoing conflict in the Middle East poses risks to Sri Lanka’s external sector outlook, particularly through energy, tourism, trade, and remittance flows, although the overall magnitude of the impact remains uncertain. While the Sri Lanka rupee remained relatively stable in early 2026, some depreciation pressures were observed following the onset of the Middle East conflict, similar to the exchange rates of regional peers.
The Board remains prepared to implement appropriate policy measures to ensure that inflation stabilises around the target while supporting the economy to reach its potential.
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