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Sri Lanka inflation to stay high through Q1 2027

Sri Lanka’s headline inflation is expected to remain in the high single digits through the first quarter of 2027, before gradually easing towards the Central Bank’s 5% target, as elevated global energy prices continue to feed into domestic costs, Central Bank Sri Lanka (CBSL) Director Economic Research Dr L R C Pathberiya said yesterday (30).

Speaking at the Monetary Policy Review, Dr Pathberiya said: “Headline inflation is projected to remain in high single digits through Q1 2027, before easing towards the 5% target. We experienced headline inflation rising to 8% in August 2026, and this will continue at high single digit levels in the coming months as well, reflecting the pass-through of the energy shock across multiple sectors in the economy. But we expect the Middle East conflict will ease going forward.”

“The year-on-year headline inflation accelerated sharply to 8% as measured by the Colombo Consumer Price Index (CCPI) in August from 2.2% in March, with the impact of the Middle East conflict and higher global energy prices increasingly passing through multiple sectors of the Sri Lankan economy,” Dr Pathberiya said.

“Also, core inflation also rose to 5.1%, reflecting broader spillovers from the energy shock. However, the contribution of energy and fuel to headline inflation has been quite volatile in numbers over the past two-and-a-half years, which fed to headline inflation. In the past five months of 2026, with the impact from the Middle East crisis, the contribution to the headline inflation from energy and fuel is significant,” he said.

Dr Pathberiya said: “From the second quarter onwards, the base effect will also help decrease inflation. We expect inflation to stabilise around 5.5% from Q2 onwards, and it will gradually move towards 5%. The outlook indicates that in the near term inflation is high above 5% level, but going forward it will stabilise around 5%.”

“Despite inflation remaining high in the near term, the good news is, inflation expectations particularly in the medium term, are projected to remain broadly anchored around the target. And stakeholders and the public generally expect inflation to return to 5% in the medium term,” Dr Pathberiya said.

Meanwhile, CBSL Governor Dr P Nandalal Weerasinghe added: “We have proactively taken measures in the monetary policy decisions in May 2026. We have seen the impact of that transmitting into the economy, from interest rates to credit growth, stable exchange rates, and what is expected.”

According to the CBSL, in May 2026, the Overnight Policy Rate (OPR) was raised by 100 basis points in May 2026 as a proactive tightening measure to counter inflationary pressures.

Dr Weerasinghe also said: “The economic growth is continuing. We have taken sufficient policy measures so far. As a result, what we can do from the central bank is to curtail the demand side coming from inflation. We are able to manage and curtail any impact that could have on headline inflation.”