Sri Lanka central bank 5% inflation target is expected to be reached by the second half of 2026, according to its latest monetary policy report. Officials project a gradual rise in the cost of living as domestic demand strengthens and energy and transport prices normalize.
Sri Lanka central bank 5% inflation target set for 2026 amid cost of living concerns
Sri Lanka central bank 5% inflation target has moved back into focus after policymakers signaled that inflation will gradually accelerate toward the benchmark by the latter half of 2026. In its latest monetary policy assessment, the regulator stated that consumer prices are projected to follow an upward path as demand conditions improve and volatile components such as food, energy, and transport return to more typical trends.
Authorities argue that the expected increase reflects a recovery phase rather than destabilizing pressure. Inflation, which had remained subdued following deflationary adjustments linked to earlier balance of payments corrections, is now forecast to stabilize around the 5 percent mark over the medium term with the support of appropriate policy measures. The central bank maintains that the trajectory will be gradual and managed within its price stability mandate.
Nonetheless, the policy stance has reignited debate among economists and lawmakers. Critics point out that past efforts to maintain a positive inflation floor have often coincided with exchange rate volatility and external financing stress. The Sri Lankan rupee experienced renewed depreciation in 2025 despite strong external inflows, raising concerns about the consistency of monetary operations. President Anura Kumara Dissanayake has previously emphasized the importance of exchange rate stability, noting that holding the rupee near the 300 level for nearly a year was presented as evidence of economic normalization.
Analysts argue that selective convertibility measures and liquidity management decisions contributed to currency pressure even as current account conditions improved. They contend that attempts to guide inflation upward through monetary easing can undermine confidence in the currency if not carefully calibrated. Supporters of the central bank’s framework counter that moderate inflation is necessary to facilitate growth and avoid deflationary stagnation.
Parliamentary oversight has intensified in recent months. Members of the Committee of Public Finance have questioned whether a fixed 5 percent benchmark adequately protects purchasing power, particularly after Sri Lanka’s first sovereign external default. Some policymakers have proposed a stricter inflation ceiling closer to 2 percent, asserting that a lower threshold would reduce the likelihood of future currency crises. Under current monetary law, price stability is defined within a flexible range that can extend up to 7 percent, reflecting the independence granted to the central bank by Parliament.
The broader intellectual debate surrounding inflation targeting is not unique to Sri Lanka. Classical economists have long warned against using inflation as a stimulus mechanism. Friedrich Hayek argued that inflation can offer only temporary gains, distorting price signals and eroding real savings. Once expectations become embedded, he cautioned, controlling further acceleration without triggering sharp corrections becomes increasingly difficult. These theoretical concerns resonate in a country that has experienced repeated cycles of depreciation and reserve depletion.
Sri Lanka’s inflation history diverged sharply from advanced economies beginning in the 1980s, following shifts in its monetary operating framework. Earlier decades saw inflation rates broadly aligned with global peers, but activist policy approaches later coincided with structural imbalances and social unrest. Episodes of aggressive rate cuts and liquidity injections have, at times, overlapped with foreign exchange shortages and rising public debt burdens.
International experience offers cautionary lessons. Advanced economies adopted quantitative easing and abundant reserve systems after the global financial crisis, seeking to support growth and prevent deflation. The policies of the Bank of England during periods of expansionary stimulus have been closely analyzed by Sri Lankan observers concerned about similar side effects, including asset bubbles and pressure on household incomes. In several cases, elevated inflation eroded disposable income even as governments sought to maintain growth momentum.
For Sri Lankan households, the immediate concern remains the cost of living. Electricity tariff adjustments, food price volatility, and transportation expenses directly affect disposable income and consumer confidence. While policymakers argue that a controlled return to moderate inflation reflects economic recovery, many citizens remain sensitive to price increases after the hardships of the recent crisis.
The central bank insists that its framework is designed to balance growth and stability. Officials emphasize that interest rate decisions and liquidity management will be calibrated to prevent renewed external imbalances while guiding inflation toward the medium-term objective. Whether this approach can maintain currency stability while achieving the Sri Lanka central bank 5% inflation target will be a defining test for monetary credibility.
As 2026 approaches, investors and households alike will closely monitor exchange rate movements, reserve levels, and domestic credit growth. The path toward 5 percent inflation may signal normalization, but its success ultimately depends on sustaining confidence in both the rupee and the broader macroeconomic framework.