Sri Lanka Holds Interest Rate at 8.75%

The Central Bank of Sri Lanka left its Overnight Policy Rate unchanged at 8.75% in July 2026, following an outsized 100 bps rate hike at its previous meeting, citing elevated inflation and heightened global uncertainty. Headline inflation accelerated to 6.8% in June from 5.4% in May, driven mainly by higher domestic energy and food prices, and is expected to remain above the bank's 5% target in the near term before gradually easing. The central bank said core inflation is also likely to rise, although inflation expectations remain anchored around the target over the medium term. Policymakers expect tighter monetary policy, together with other government measures, to moderate credit growth and demand pressures. Meanwhile, gross official reserves stood at USD 6.45 billion at the end of June, while the rupee stabilized in recent weeks and workers' remittances remained resilient despite renewed Middle East tensions and higher fuel import costs weighing on the external sector.

The Central Bank of Sri Lanka raised its benchmark interest rate by 100 basis points to 8.75% at its May 2026 meeting, marking the first rate hike since March 2023 as policymakers sought to curb inflation and support the rupee amid rising energy costs linked to the Iran conflict. The move surprised markets, with expectations of a hike of only 25 basis points or slightly more. Inflation accelerated to 5.4% in April from 2.2% in March, exceeding the central bank's 5% target, driven largely by sharp increases in domestic energy prices following persistently high global oil costs, while the rupee has depreciated about 8.7% since early March. Authorities have introduced fuel rationing, higher electricity tariffs, and import restrictions to ease pressure on the currency. The central bank said inflation is likely to remain above its 5% target in the near term before stabilizing. The decision comes ahead of an IMF board meeting that could unlock about $700 million in funding for the country.

The Central Bank of Sri Lanka kept its benchmark interest rate unchanged at 7.75% at its March 2026 meeting, maintaining its current stance amid uncertainties stemming from the ongoing Middle East conflict. Headline inflation remained low at 1.6% in February, well below the 5% target, providing room to absorb the impact of higher domestic energy prices following a surge in global energy costs and trade disruptions. Inflation is now expected to reach the target in Q2 2026, earlier than previously projected, and stabilize around that level thereafter. Meanwhile, economic activity remained resilient, with GDP expanding 5.0% in 2025 despite disruptions from Cyclone Ditwah, while early 2026 indicators point to a strong recovery. However, prolonged geopolitical tensions could weigh on growth. The Sri Lankan rupee stayed broadly stable, although some depreciation pressures emerged following the escalation of the Middle East conflict.