- Decision
- Maintain
- Rate change
- 0 bps
- overnight policy rate
- 8.75%
The Central Bank of Sri Lanka held the Overnight Policy Rate at 8.75% in its July 2026 monetary policy review, citing renewed tensions in the Middle East that have driven up global commodity prices, particularly petroleum, lifted inflation above target and worsened uncertainty over the domestic and global outlook, even as earlier tightening and other policy measures are expected to moderate credit growth and demand pressures. The hold followed an unchanged 7.75% setting from July 2025 through March 2026 and a 100 bp increase in May 2026. Headline inflation accelerated to 6.8% y-o-y in June 2026, mainly due to higher domestic energy and food prices, and is expected to remain above the 5% target in the near term before gradually returning to target, while core inflation is also expected to rise and demand conditions have strengthened, though medium-term inflation expectations remain well anchored. On the external side, the current account has recorded a deficit since April 2026 as higher fuel import costs widened the merchandise trade deficit and tourism earnings slowed, although workers’ remittances have remained strong and the Sri Lanka rupee has stabilised somewhat in recent weeks. The Central Bank of Sri Lanka said the conflict-driven surge in commodity prices could dampen global economic prospects and spill over to Sri Lanka through multiple channels, and it will continue to monitor risks closely while expecting previous tightening to transmit further and standing ready to act to keep inflation around target over the medium term.
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.