Sri Lanka central bank keeps key policy rate steady after the Monetary Policy Board decided to maintain the Overnight Policy Rate (OPR) at 8.75%, citing evolving domestic and global economic conditions alongside rising inflationary pressures linked to higher energy prices.
Sri Lanka central bank keeps key policy rate steady as OPR remains at 8.75%
The Central Bank of Sri Lanka announced that it would keep the Overnight Policy Rate unchanged at 8.75 percent, following a review of recent economic developments and the outlook for both the domestic and global economy. The decision reflects the Bank’s assessment that previous monetary tightening measures remain appropriate while policymakers continue to monitor inflation, external sector developments and economic growth.
In its latest monetary policy statement, the Central Bank highlighted renewed geopolitical tensions in the Middle East as a key external risk. The conflict has pushed up global commodity prices, particularly petroleum, increasing concerns over global economic growth while creating potential spillover effects for Sri Lanka through higher import costs and inflation.
Despite these external pressures, policymakers noted that inflation expectations remain broadly anchored around the medium-term target of 5 percent. Headline inflation accelerated to 6.8 percent year-on-year in June 2026, largely driven by increases in domestic energy and food prices. The Bank expects inflation to remain above the target in the near term before gradually easing back toward the desired level.
Core inflation is also projected to rise and remain close to the headline inflation target, reflecting strengthening domestic demand alongside supply-side price pressures. However, the Central Bank believes that the monetary tightening introduced in May 2026, together with complementary government policy measures, will gradually moderate credit expansion and reduce demand-driven inflationary pressures over the coming months.
The statement noted that while inflation has risen in recent months, earlier conditions had provided policy space to absorb temporary price shocks. Consumer prices were significantly below target earlier in the year, allowing the Central Bank to accommodate the impact of higher global energy prices without making further immediate adjustments to monetary policy.
The external sector also remains under close observation. According to the Central Bank, the pressure created by higher fuel import costs has eased somewhat since April, although renewed tensions in the Middle East continue to present uncertainty. Sri Lanka’s external current account has recorded a deficit in recent months, mainly because increased petroleum imports widened the merchandise trade deficit while tourism earnings moderated.
Looking ahead, policymakers expect recent policy actions to curb import demand, including imports of motor vehicles, thereby helping ease pressure on foreign exchange reserves. At the same time, workers’ remittances have continued to perform strongly throughout 2026, providing important support to the country’s external finances.
Sri Lanka’s Gross Official Reserves stood at US$6.45 billion at the end of June 2026 despite ongoing foreign debt service payments. The Central Bank also noted that the Sri Lankan rupee has shown signs of stabilisation in recent weeks, reflecting the cumulative impact of recent monetary and fiscal policy measures.
The Bank reaffirmed its commitment to maintaining price stability while supporting sustainable economic growth over the medium term. Officials said they will continue to closely monitor domestic and international developments and remain prepared to take additional policy action if emerging risks threaten inflation or broader macroeconomic stability.
The decision to leave the Overnight Policy Rate unchanged signals the Central Bank’s confidence that existing policy settings remain appropriate as inflationary pressures gradually work through the economy. At the same time, policymakers acknowledged that geopolitical developments, commodity price movements and global financial conditions continue to pose risks that require careful monitoring.
The next scheduled monetary policy announcement by the Central Bank is expected on 30 September 2026, when the Monetary Policy Board will reassess economic conditions and determine whether any adjustments to policy settings are necessary.