Economy & Market

5% inflation target to be met in Q2 2026: CBSL

The Central Bank of Sri Lanka’s inflation target of 5% is to be reached in the second quarter of 2026 rather than the third, due to the price shock brought on by global oil prices, CBSL Governor Dr. Nandalal Weerasinghe said.

“Compared to the earlier projections, before this Middle East conflict, we were hoping to reach the inflation target towards 5% around the third quarter this year. Because of this shock, and some increases in energy prices, we’d probably reach the target somewhere in the second quarter of 2026, that’s what we see right now, based on certain assumptions,” Weerasinghe said.

Sri Lanka’s headline inflation in the month of February decelerated from the 2.3% in January to 1.6% in February, CBSL data shows. Though Sri Lanka’s headline inflation entered into a positive territory in August of 2025, headline inflation continued to average 2.6% percentage points below the inflation target, up until last month, which saw further deceleration.

“One of the factors is that our inflation target is 5%, actual inflation last month was 1.6%. By the end of this month also it will be 2%, based on our projections,” Weerasinghe said, commenting on the Monetary Policy Board’s decision to keep the Overnight Policy Rate (OPR) unchanged at 7.75%.

Weerasinghe further justified the target, which had in the recent past drawn scrutiny, by stating that it acts as a buffer, in addition to the accumulated reserves. “In terms of inflation we have sufficient buffer, for us to be able to maintain inflation at around 5%. There are a lot of uncertainties, and it is difficult to project a longer period, because a lot of things are changing day by day, week by week.”

The position is that in terms of inflation, we have good space to absorb this external shock, because we have this advantage of running low inflation, compared to the target.”

Referring to Sri Lanka’s national buffers, the Governor noted that in the month of February, Sri Lanka accumulated its largest reserves value in recent years, also key to cushioning against the adverse effects of the price shock.

“The other point is in terms of the reserve buffer, compared to where we were during the last couple of years, we were in the highest position with $ 7.5 billion, at the end of February. This is also a better position which has created some space for us to absorb this kind of external shock for a period. Whether this will prevail for a long period is still uncertain, but now we are in a better position when it comes to reserves and inflation.”

He concluded that risks to the financial sector were yet to be anticipated. “We don’t see any risks to financial sector stability. We have not seen any significant impact on the banking sector and financial sector, even with the current volatilities in the markets.”

“From the fiscal policy side, the Government has been able to perform better in terms of fiscal performances, and also build up sufficient buffers to absorb some of these external shocks,” he added.

source: The Morning