FINANCIAL CHRONICLE – In a recent announcement, the Central Bank of Sri Lanka has decided to maintain the Overnight Policy Rate (OPR) at 8.75%, reflecting its assessment of both local and international economic conditions.
The bank noted that heightened tensions in the Middle East have led to a rise in global commodity prices, especially in the oil sector. These changes are expected to negatively impact global economic expectations, which may also affect the domestic economy.
As of February 2026, inflation remains low at 1.6% year-on-year, which is significantly below the targeted rate of 5%. This low inflation level offers room to absorb the effects of increasing energy costs and potential inflationary pressures that may follow.
In June 2026, headline inflation rose to 6.8% year-on-year, driven primarily by increases in domestic energy and food prices. It is anticipated that headline inflation will stay above the 5% target in the short term before gradually aligning with the goal. Additionally, core inflation is projected to rise and hover around the headline inflation target.
The Central Bank’s statement emphasized the decision to hold the OPR steady was made during a Monetary Policy Board meeting, following a comprehensive evaluation of the shifting economic landscape. The board is mindful of the potential spillover effects of international developments, particularly from the Middle East, on the local economy.
Although headline inflation is currently experiencing upward pressure, inflation expectations are still well-aligned with the medium-term target. Factors contributing to the rise in inflation are mainly supply-driven, although there is a noted strengthening in demand within the economy. The tightening of monetary policy initiated in May 2026, along with other government measures, is predicted to help moderate credit growth and alleviate demand pressures going forward.
The external sector’s challenges linked to the Middle East situation have somewhat subsided, but uncertainties persist due to ongoing tensions. Since April 2026, the external current account has recorded a deficit, primarily due to the increased costs of fuel imports, which have widened the merchandise trade deficit and slowed tourism revenues. Future import demand, particularly for vehicles, is expected to decline in light of recent policy interventions. Conversely, remittances from workers have remained robust throughout 2026. As of the end of June 2026, Gross Official Reserves stood at USD 6.45 billion amid ongoing foreign debt repayments, and the Sri Lankan rupee has shown some signs of stabilization due to the effects of implemented policies.
The Central Bank will continue to monitor both domestic and global developments for any emerging risks. It anticipates that the previously executed monetary policy tightening will gradually impact the economy. The bank is prepared to take necessary actions to ensure inflation stabilizes around the 5% target while also fostering economic growth potential in the medium term.
The next scheduled announcement regarding the monetary policy review is set for September 30, 2026.
