- Decision
- Maintain
- Rate change
- 0 bps
- overnight policy rate
- 7.75%
The Monetary Policy Board of the Central Bank of Sri Lanka kept the Overnight Policy Rate (OPR) at 7.75 percent, judging the current stance sufficient to guide inflation toward the 5 percent target while nurturing the economic rebound as deflationary pressures fade. After holding the OPR at 8.00 percent through March, the board cut it by 25 bp to 7.75 percent in May before pausing at this review. Market lending rates have declined further since that easing, liquidity remains ample and private-sector credit growth is described as “robust and broad-based”, underpinning the 4.8 percent year-on-year GDP expansion in Q1 2025 and a continued near-term growth momentum. Headline inflation in the Colombo CPI, still mildly negative, is expected to turn positive this quarter and move steadily to 5 percent, with core inflation also set to edge higher. The external sector has shown resilience: tourism and remittance inflows strengthened, gross official reserves stayed “healthy” despite a wider trade deficit, and the central bank has continued net FX purchases while receiving the fifth IMF-EFF tranche in early July. Noting rising global trade frictions and geopolitical tensions, the board reiterated its readiness to act as needed to keep inflation on target and support the economy’s potential.
Rate evolution
The Central Bank of Sri Lanka held the Overnight Policy Rate (OPR) at 7.75% through January and March 2026 before raising it by 100 basis points to 8.75% in May 2026 and keeping it there in July, leaving it 100 basis points higher over the period. The extended hold reflected a view that the current stance would steer Colombo Consumer Price Index inflation towards the 5% target while supporting growth, with inflation at 2.1% in December 2025 and 1.6% in February 2026, food prices edging higher after Cyclone Ditwah and festive demand, and the Board judging that the low inflation level provided space to accommodate higher domestic energy prices stemming from the rise in global energy prices and trade disruptions amid the Middle East conflict. Until then, the Board also pointed to 5.0% growth in 2025, a strong post-Cyclone recovery in early 2026, notable private-sector credit expansion linked to improving activity, vehicle imports and rebuilding, and a robust external sector, with stronger export earnings than imports, higher remittances and tourism earnings, gross official reserves rising to USD 7.3 bn at end-February 2026 from USD 6.8 bn at end-2025, and the rupee relatively stable in early 2026 despite some depreciation pressures after the onset of the Middle East conflict.
In May 2026, however, it tightened as heightened Middle East tensions kept global oil prices high and necessitated sharp upward adjustments to domestic energy prices, lifting April inflation to 5.4%, while demand conditions also strengthened through continued credit expansion, credit-driven imports and leading indicators of activity. In July 2026, the Central Bank of Sri Lanka left the OPR unchanged at 8.75% as renewed Middle East tensions drove a further surge in global commodity prices, particularly petroleum, and pushed headline inflation to 6.8% in June on higher domestic energy and food prices, but it said inflation expectations remained well-anchored around target and that the May tightening, together with other policy measures, should gradually moderate credit growth and demand pressures. It also noted that pressure on the external sector had eased somewhat even as uncertainty remained high, with the external current account in deficit since April because higher fuel import costs widened the merchandise trade deficit and tourism earnings slowed, while workers’ remittances remained strong, gross official reserves stood at USD 6.45 bn at end-June 2026 amid foreign debt service payments, and the rupee had stabilised somewhat in recent weeks reflecting the policy measures taken thus far.