Sri Lanka interest rates continued to edge higher in July as banks raised deposit rates to meet growing credit demand, even after the central bank’s rate cut in May 2025, signaling stronger confidence in the country’s economic recovery.
Sri Lanka interest rates rise as banks raise deposits and credit demand strengthens
The latest central bank data shows that Sri Lanka’s weighted average new fixed deposit rate, which had dropped to 6.62 percent in May following the policy rate cut, climbed to 6.85 percent in June and 6.90 percent in July. Despite the easing of policy rates, banks are now offering 12-month deposits at 7.75 percent and above to attract funds as demand for credit rises alongside economic recovery.
The economic rebound has also been supported by reduced government capital expenditure, which lowered domestic state borrowing and enabled private sector resources to be channeled toward more productive investments. This shift has been credited with creating conditions for longer-term growth compared to past reliance on bureaucratic spending.
Lending rates have shown a similar trend. The weighted average new lending rate rose to 10.56 percent in April, eased to 10.28 percent in June, and picked up again to 10.40 percent in July. Market analysts suggest that banks are balancing the impact of the earlier rate cut with the need to secure stable liquidity positions, while the central bank avoids large-scale money printing, unlike in late 2024.
Analysts have also highlighted the presence of a so-called “ramrod rate anomaly” in Treasury bill yields, where yields are tightly bunched together across maturities. Historically, such anomalies have often preceded currency crises and sharp interest rate adjustments. However, the current monetary environment remains more stable, with fewer aggressive open market operations compared to past cycles.
The central bank’s current approach, which includes moral suasion to keep short-term rates down, has raised debate over whether suppressed yields can distort market signals. Some economists argue that preventing natural rate movements could discourage debt rollovers and weaken long-term financial stability.
Sri Lanka’s interest rate trajectory is also linked to structural reforms in monetary policy. While new legislation has expanded the central bank’s authority under IMF-backed frameworks, critics warn that excessive intervention risks repeating historical cycles of inflation and currency weakness. Lessons from international experience, such as the U.S. Federal Reserve’s post-war policies, highlight the dangers of inflationary open market operations despite low fiscal deficits.
Looking forward, the direction of Sri Lanka interest rates will depend on how the central bank balances liquidity management, inflation expectations, and credit growth. If monetary stability is maintained, some analysts believe interest rates could gradually return to historically lower levels. However, the risk of renewed interventionist policies remains a concern for both investors and policymakers monitoring the country’s recovery path.