Low government borrowing and inflation control cited as key stabilizing factors
Sri Lanka’s interest rates are expected to remain largely stable over the next two years, according to Asanka Herath, Head of Equities at LYNEAR Wealth Management. In an interview with CA Sri Lanka, Herath highlighted several macroeconomic trends that point to minimal upward pressure on rates in the near term.
He noted that the government’s need for domestic borrowing will be significantly reduced due to the anticipated primary surplus in both 2025 and 2026. This, coupled with a positive Treasury cash balance, means less reliance on local banks and investors to finance day-to-day operations.
“The government is going to require less funding from the domestic market, which limits the pressure to hike rates,” Herath said.
He also emphasized the Central Bank of Sri Lanka’s (CBSL) firm commitment to maintaining inflation at moderate levels. The CBSL is closely monitoring private credit growth and is expected to act swiftly if it sees signs of overheating in the economy.
Supporting the outlook for rate stability, the Colombo Consumer Price Index (CCPI) showed easing deflationary trends in May. Headline deflation slowed to 0.7%, compared to 2% in April, aligning with the Central Bank’s short-term projections.
Herath further added that the CBSL remains alert to external pressures, particularly in managing import demand. “If the Central Bank senses that import demand is likely to be excessive, it will take action to cool the economy,” he said.
Despite the overall stable outlook, Herath projected a modest rate increase of 100 basis points by the end of 2025. This would bring the one-year deposit rate to around 10%, though after taxes, investors would likely take home a return of 6.5% to 7%.