Central Bank of Sri Lanka Holds Overnight Policy Rate at 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