Policy rate stays at 8.75% amid inflation surge

The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has decided to maintain the Overnight Policy Rate (OPR) at 8.75%, citing evolving domestic and global economic conditions.The decision was taken at the Board’s latest meeting after considering the effects of monetary policy tightening introduced in May 2026, as well as other measures that have already taken effect.

The Board also highlighted uncertainties arising from geopolitical tensions in the Middle East and potential economic risks associated with El Niño conditions.Despite the challenges, Sri Lanka’s economy continued to show resilience, recording real growth of 4.7% year-on-year during the first half of 2026.

The CBSL said leading economic indicators point to continued economic momentum, although global and climate-related uncertainties could weigh on the outlook.Growth in credit to the private sector has gradually moderated following recent policy measures. However, the Central Bank expects credit flows to remain sufficient to support economic activity.

Headline inflation increased to 8.0% year-on-year in August 2026, mainly reflecting the impact of higher energy prices across multiple sectors of the economy.The CBSL expects headline inflation to remain in the high single digits through the first quarter of 2027, before gradually easing towards its 5% target.

Core inflation has also increased due to spillover effects from higher energy costs. Nevertheless, the Central Bank said medium-term inflation expectations remain broadly anchored around the target.Sri Lanka’s external sector has remained resilient despite continuing geopolitical tensions in the Middle East.

The country’s current account is estimated to have recorded a surplus in August 2026, following four consecutive months of deficits. The improvement was supported by moderated merchandise imports and increased earnings from tourism and workers’ remittances.

Gross official reserves rose to US$6.9 billion at the end of August 2026, supported by net foreign exchange purchases by the Central Bank.The Sri Lankan rupee, which appreciated against the US dollar in July and August, recorded mixed movements in September.

The CBSL also noted that the recent sovereign rating upgrade is expected to further strengthen market sentiment.The Central Bank said it will continue to adopt a forward-looking and data-dependent approach to monetary policy.

It said that if inflationary pressures intensify or inflation expectations show signs of becoming unanchored, the Bank will take timely and appropriate measures to ensure inflation stabilises around its target while supporting economic activity at its potential over the medium term.