The latest Sri Lanka interest rate decision to keep policy rates unchanged comes as the Central Bank focuses on stabilising inflation and supporting economic recovery. The move signals confidence in improving liquidity, reserves, and domestic demand amid shifting global conditions.
Sri Lanka interest rate decision aims to steady inflation and support growth
Sri Lanka’s Central Bank has opted to maintain its key policy rate at 7.75 percent, banking on a measured approach to steering inflation back to its 5 percent target while supporting a fragile but improving growth environment. The November 2025 decision reflects a broader strategy of fostering stability in prices, credit flows and the external sector as the island navigates a year of intense currency pressure, shifting import dynamics and record current account surpluses.
The monetary authority’s decision arrives at a significant juncture. After months of steady depreciation, the currency has begun to find relief as foreign exchange liquidity improves, allowing the Central Bank to slow the pace of interventions that had strained domestic liquidity. The statement accompanying the rate announcement pointed toward this easing pressure, highlighting that the exchange rate has stabilised as reserve inflows strengthen and foreign participation becomes more predictable.
Gross official reserves, which remained above 6 billion dollars throughout 2025, benefited from regular foreign exchange purchases along with expected inflows from multilateral partners. Recent approvals from the Asian Development Bank, amounting to roughly 270 million dollars in budget support, combined with an anticipated IMF tranche of 358 million dollars later in December, are expected to reinforce the country’s external buffers at a delicate time for global financial markets.
Even as gross reserves plateaued, Sri Lanka made progress in reducing reserve-related liabilities owed to the Reserve Bank of India and the International Monetary Fund. This transition has improved the Central Bank’s net foreign asset position, ensuring compliance with IMF net international reserve targets and easing concerns around short-term vulnerability. Analysts note, however, that achieving sustainable external stability will require careful management of sterilised and unsterilised interventions, particularly as the Bank continues purchasing foreign currency.
Experts have repeatedly cautioned that the monetary authority could risk overshooting the limits of its deflationary strategy if it accumulates more dollars than the system can absorb without inducing depreciation. Some argue that selling down bond holdings—or restructuring them through methods such as stripping coupons to create deep discount instruments—could offer a smoother path to maintaining liquidity while supporting the currency. These structural tools remain a point of debate, especially after the introduction of step-down bonds that markets are still adjusting to.
Domestic interest rate movements provide additional clues about the evolving monetary landscape. Prime lending rates have increased slightly in recent weeks, reviving speculation that private credit could continue expanding without triggering the severe external crises seen in previous cycles. The overnight call rate hovered around 8.96 percent, while collateralised repo rates rose marginally above 8 percent amid tightening excess liquidity. Such liquidity contractions have historically been linked to unsterilised interventions to meet government foreign debt obligations.
Meanwhile, inflation trends have shown mixed signals. Headline inflation, based on the Colombo Consumer Price Index, accelerated for the third consecutive month in October, although the Central Bank expects a more gradual rise than earlier forecasts suggested. Officials continue to assure markets that medium-term inflation expectations are well anchored near the 5 percent target, even as core inflation picks up modestly with improving demand and recovering consumer confidence.
Economic momentum has been reinforced by a resurgence in private sector credit, supported by relatively low interest rates and pent-up demand, particularly for vehicle imports. This broader credit expansion points to a reawakening of domestic activity after several years of suppressed consumption and investment. The growth outlook remains cautiously optimistic, though vulnerabilities persist.
External sector dynamics also continue to evolve. Imports have increased in recent months, widening the trade deficit. Yet strong inflows from tourism and worker remittances continue to cushion the current account. As these inflows stabilise, policymakers believe the country can maintain external balance even as domestic demand strengthens.
The Central Bank reaffirmed its commitment to monitoring data closely amid a shifting global backdrop. The policy board emphasised its readiness to act decisively should conditions require further adjustment, with the twin goals of anchoring inflation and enabling the economy to reach its full potential. As Sri Lanka progresses through the final quarter of 2025, the interest rate stance signals continuity—and cautious optimism—during a year marked by currency volatility, reserve transitions, and renewed growth ambitions.