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Inflation relief months away: CBSL

Governor Dr. Nandalal Weerasinghe

CBSL holds Overnight Policy Rate at 8.75%, saying effects of May tightening have largely materialised
Headline inflation is projected to remain in high single digits through 1st quarter of 2027 before easing towards 5% target

Sri Lanka will face several more months of elevated inflation, as the energy shock spreads through the economy, with the Central Bank of Sri Lanka (CBSL) projecting inflation to remain in high single digits through early 2027.

The CBSL held its Overnight Policy Rate at 8.75 percent, following its September 29 board meeting, stating that the effects of monetary tightening in May and other measures had already materialised to a large extent.

“Headline inflation is projected to remain in high single digits through 1Q 2027, before easing towards the 5 percent target,” it said in its September monetary policy review.

Headline inflation rose to 8.0 percent in August, as the higher energy costs passed through multiple sectors.

Core inflation also increased because of the spillovers from the higher energy prices, although the medium-term inflation expectations remained broadly anchored around the target, the CBSL said.

The Monetary Policy Board considered the impact of earlier tightening alongside the uncertainty arising from the tensions in the Middle East and potential risks from the El Niño conditions.

“The board paid particular attention to the effects of the proactive monetary policy tightening in May 2026, alongside the other measures that had already materialised to a large extent,” the statement said.

The CBSL said it remained ready to act if the inflationary pressures intensified or expectations showed signs of moving away from the target.

“Should the inflationary pressures intensify or inflation expectations show signs of de-anchoring, the CBSL stands ready to take timely and appropriate measures to ensure that inflation stabilises around the target, while supporting the economy to operate around its potential over the medium term,” it said.

Sri Lanka’s economy grew 4.7 percent year-on-year in the first half of 2026. The leading indicators pointed to continued momentum, although the global and climate-related uncertainties could weigh on the outlook.

The private-sector credit growth was gradually moderating in response to the recent policy measures, the CBSL said, adding that the credit flows were expected to remain sufficient to support the economic activity.

The inflation forecast faces upside risks from a further escalation or prolongation of the geopolitical tensions, which could push the domestic energy, transport and fertiliser costs above the expectations, according to the review’s forecast annex.

More severe weather associated with El Niño could affect the agricultural production, while greater rupee depreciation, resulting from the adverse market sentiment and external shocks, could add to the price pressures.

The larger-than-expected declines in the global energy and commodity prices or a smaller impact from El Niño could lower inflation relative to the forecast. The CBSL said the outlook remained subject to the elevated uncertainty.

The external sector remained resilient, with the current account estimated to have recorded a surplus in August, after four consecutive months of deficits. The moderating merchandise imports and improved tourism earnings and workers’ remittances supported the turnaround.

The gross official reserves rose to US $ 6.9 billion at end-August, supported by the CBSL’s net foreign exchange purchases. The figure includes the swap facility from the People’s Bank of China.

The rupee appreciated against the US dollar in July and August, before recording mixed movements in September. The CBSL said the recent sovereign rating upgrade was expected to further strengthen the market sentiment.