Sri Lanka's Central Bank Sees No More Rate Hikes This Year

Sri Lanka's central bank does not anticipate further interest rate increases this year following its surprise 100 basis-point hike in May, Governor Nandalal Weerasinghe told Reuters on Tuesday. The governor said inflation is expected to peak around current levels before easing back toward the 5% target in the first half of 2027.

The comments signal that monetary policy is likely to remain steady at 8.75% for the rest of 2026, with the next rate announcement scheduled for September 30. They come as the country grapples with a sharp rise in prices driven by energy costs and the economic fallout from the war in Iran.

Contents

01

Why the Central Bank Hiked in May

02

Where Inflation Stands Now

03

Growth and the IMF Backdrop

04

Building External Buffers

Why the Central Bank Hiked in May

Sri Lanka's central bank surprised markets with a 100 basis-point hike in May, its first rate increase in more than three years. The move was aimed at containing inflation fueled by the ongoing war in Iran.

Governor Weerasinghe described the hike as a “proactive” step taken because the central bank expected inflation to rise to 7%. He said current inflation was broadly on expected lines, adding: “We need to monitor whether there will be any deviation from what we thought.”

Where Inflation Stands Now

Sri Lanka's key inflation index climbed to 7.3% in July, the sharpest increase in three years, driven by rising energy costs. Some analysts expect the inflation rate to climb to 8% in November.

Weerasinghe noted the full impact of the May rate increase would take 12 to 18 months to filter through the economy, with inflation likely to return to the 5% target in the first half of next year.

Growth and the IMF Backdrop

Sri Lanka's economy grew by 5% in 2024 and 2025, rebounding from a 7.3% contraction in 2022. The governor emphasized that “low inflation is a necessary condition for future growth,” projecting economic expansion in the 4%-5% range despite global headwinds.

The International Monetary Fund backed the May rate hike, released $695 million under its $2.9 billion program, and forecast 3% growth for 2026.

Building External Buffers

Maintaining a steady build-up in foreign exchange reserves remains a key priority for the governor as rising fuel import costs threaten fresh pressure on Sri Lanka's external accounts. Weerasinghe aims to boost gross foreign exchange reserves to about $8 billion by year-end from $6.6 billion currently.

The government has raised fuel prices by more than 35%, introduced rationing, and declared Wednesdays a public holiday to ease fiscal strain.