Sri Lanka’s Central Bank has opted to maintain its Overnight Policy Rate (OPR) at 8.75%, attributing the ongoing inflationary pressures to the impact of energy price increases following recent geopolitical tensions in the Middle East. As of August, the headline inflation rate reached 8 percent.
The Central Bank’s statement projected that headline inflation is likely to remain in the high single digits until the first quarter of 2027, before gradually approaching the targeted 5 percent. The rise in core inflation has also been linked to the repercussions of elevated energy prices. Despite the current inflation surge, the Central Bank noted that medium-term inflation expectations continue to be largely aligned with the set target.
During a recent meeting, the Monetary Policy Board decided to keep the OPR steady at 8.75%. This decision was made after a thorough assessment of current conditions and future expectations within both the domestic and international economies. The Board emphasized the significance of previous monetary policy measures implemented in May 2026 and acknowledged the uncertainties arising from geopolitical developments in the Middle East and the economic risks posed by potential El Niño conditions.
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Domestic economic performance has shown resilience, with a year-on-year real growth rate of 4.7% recorded in the first half of 2026. While leading economic indicators suggest ongoing positive momentum, global uncertainties and climate factors may impact future growth. Although the growth rate of credit to the private sector is beginning to slow due to recent policy actions, the availability of credit is expected to remain adequate to support economic activities.
In August 2026, headline inflation rose to 8.0% year-on-year, reflecting the widespread effects of the energy shock across various sectors. The Central Bank forecasts that headline inflation will stay in high single digits through the first quarter of 2027 before easing towards the 5% target. Core inflation has also increased due to higher energy costs, but medium-term inflation expectations are still generally anchored around the target.
In the context of ongoing Middle Eastern tensions, the external sector has shown resilience, with an estimated current account surplus recorded in August 2026 following four months of deficits. This improvement was supported by a reduction in merchandise imports and increased earnings from tourism and remittances. The country’s gross official reserves rose to USD 6.9 billion at the end of August 2026, bolstered by net foreign exchange purchases by the Central Bank. The Sri Lankan rupee experienced appreciation against the US dollar in July and August 2026, although its performance was mixed in September. A recent upgrade in the sovereign rating is anticipated to further enhance market confidence.
The Central Bank remains committed to a forward-looking, data-driven approach in its policy decisions. If inflationary pressures escalate or if inflation expectations begin to shift away from the target, the Central Bank is prepared to implement timely and suitable measures to stabilize inflation while fostering economic growth potential over the medium term.
The next scheduled monetary policy review statement will be released on November 20, 2026.
