- Decision
- Maintain
- Rate change
- 0 bps
- overnight policy rate
- 7.75%
The Central Bank of Sri Lanka held the Overnight Policy Rate at 7.75% in its March 2026 review, judging that the current low inflation rate provides room to absorb the effects of a significant domestic energy price increase driven by higher global energy prices and trade disruptions amid the ongoing Middle East conflict, while inflation is now expected to reach the 5% target in Q2-2026 earlier than previously anticipated and remain around that level thereafter. The hold followed another decision in January 2026 to keep the OPR at 7.75%. Headline inflation was 1.6% year on year in February 2026 against the 5% target, while the economy grew 5.0% in 2025 and leading indicators pointed to a strong post-Cyclone recovery in early 2026, though the central bank said a prolonged conflict could weigh on activity. The external sector remained robust in the first two months of 2026, gross official reserves rose to USD 7.3 bn at end-February, and the Sri Lanka rupee was relatively stable in early 2026 although some depreciation pressures emerged after the conflict began. The central bank said heightened geopolitical tensions have lifted energy prices and disrupted trade, creating elevated uncertainty for both global and domestic conditions. It said it remains prepared to take appropriate policy measures to keep inflation around target while supporting the economy to reach its potential, with the next regular monetary policy statement due on 26 May 2026.
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.