Sri Lanka Holds Key Rate at 8.75%

The Central Bank of Sri Lanka kept its Overnight Policy Rate unchanged for a second straight meeting at 8.75% in September 2026 as widely expected, citing the effects of the proactive monetary tightening delivered in May. The decision also reflected uncertainty from Middle East tensions and potential El Niño risks. Headline inflation accelerated to a three-year high of 8% in August, with the energy shock pushing fuel prices in the oil-importing economy. Inflation is projected to remain in the high single digits through Q1 2027 before easing toward the 5% target. Meanwhile, the economy grew 4.7% in the first half of 2026, while private-sector credit growth moderated but remained sufficient to support activity. The current account was estimated to return to a surplus in August after four months of deficits, supported by moderated imports, tourism and remittances. Gross official reserves rose to USD 6.9 billion at end-August.

The Central Bank of Sri Lanka left its Overnight Policy Rate unchanged at 8.75% in July 2026, in line with expectations, as policymakers expect the 100-basis-point rate hike delivered in May to gradually reduce inflationary pressures as its effects filter through the economy. 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. 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 IMF expects Sri Lanka's economy to grow 3% this year after expanding 5% in 2025.

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.