Interest rates expected to ease in Sri Lanka as the Central Bank signals continued monetary stability, with private sector credit projected to sustain its growth momentum despite recent fluctuations in borrowing activity.
Interest rates expected to ease as credit growth continues
Sri Lanka’s monetary policy outlook indicates a gradual easing of market interest rates in the coming months, according to Central Bank of Sri Lanka (CBSL) Economic Research Director Dr. Lasitha Pathberiya. Speaking at the Monetary Policy Review No. 2 of 2026, he emphasized that the downward adjustment observed in recent months is expected to persist, reinforcing a supportive environment for economic activity.
Market interest rates have already shown a broad-based decline, despite a temporary uptick recorded in November and December 2025. The policy stance remains unchanged, with the Overnight Policy Rate (OPR) held at 7.75%, a level maintained since May 2025 following a 25 basis point reduction from 8%. This stability reflects the Central Bank’s confidence in the current macroeconomic trajectory and its cautious approach to balancing inflation and growth.
Alongside easing rates, private sector credit growth continues to be a key driver of economic recovery. Data from January 2026 shows year-on-year growth of 26.3% in private sector credit extended by licensed commercial banks. Over the course of 2025, total credit expansion reached approximately Rs. 2 trillion, a significant increase compared to around Rs. 800 billion recorded in 2024. This upward trend underscores renewed business confidence and improved financial sector conditions.
However, short-term lending dynamics reveal a more nuanced picture. New private sector borrowing experienced a notable decline in January 2026, dropping to Rs. 82.6 billion — the lowest level in 11 months. This contraction extended a slowdown that emerged in the aftermath of Cyclone Ditwah, which disrupted economic activity and dampened immediate credit demand.
Borrowing from domestic commercial banks also followed a downward trajectory. After peaking at Rs. 263 billion in November 2025, new lending fell to Rs. 183 billion in December and further to Rs. 108 billion in January. These figures represent some of the lowest monthly lending levels recorded over the past year, with only April and February 2025 posting weaker performance.
Despite this slowdown in fresh credit uptake, the overall stock of private sector debt has continued to expand. By January 2026, outstanding credit had risen to Rs. 10.3 trillion, maintaining the same 26.3% year-on-year growth rate. This suggests that while new borrowing has moderated, existing credit pipelines remain robust, supporting ongoing economic activity.
The CBSL’s latest credit supply survey points to improving conditions in the financial system. Banks have indicated an increased willingness to lend across retail, corporate, and small and medium enterprise (SME) segments. This optimism is attributed to several factors, including anticipated growth in business activity, enhanced liquidity within the banking sector, and a generally favourable economic outlook supported by political stability.
Nevertheless, external risks remain a consideration. The survey findings were compiled prior to escalating geopolitical tensions, including military developments in the Middle East that have influenced global fuel markets. These developments have led to higher domestic fuel prices, with increases exceeding 30% since the onset of the conflict, potentially affecting business costs and consumer spending.
CBSL Governor Dr. Nandalal Weerasinghe noted that, despite these pressures, there is currently no evidence suggesting that SMEs require targeted credit relief. Importantly, the banking sector has not observed a significant rise in non-performing loans, indicating that borrowers have largely managed to absorb increased costs without widespread financial distress.
Inflation dynamics also remain within manageable bounds. The Central Bank expects inflation to reach approximately 2% by the end of March 2026, factoring in the impact of fuel price adjustments and their spillover effects. Looking ahead, the medium-term inflation target of 5% incorporates anticipated electricity tariff increases, including a planned 13.56% hike by the Ceylon Electricity Board in the second quarter of the year.
Overall, the outlook suggests that interest rates expected to ease will align with broader efforts to sustain economic recovery while maintaining price stability. The continuation of private sector credit growth, supported by improved financial conditions and policy consistency, is likely to play a central role in driving Sri Lanka’s economic momentum in the months ahead.