Sri Lanka central bank holds policy rate unchanged

COLOMBO: Sri Lanka’s central bank kept its overnight policy rate unchanged on Wednesday, adopting a cautious stance amid uncertainty over the inflationary impact of energy prices due to the Middle East crisis.

The Central Bank of Sri Lanka (CBSL) maintained the overnight policy rate at 7.75%, as forecast by a Reuters poll, citing low inflation and a restrained approach on the fallout of the US-Israeli war on Iran.

Inflation is now expected to reach the central bank’s target of 5% in the second quarter of 2026, it said in a statement, after Sri Lanka raised fuel prices by about 35% this month.

“However, spillovers from the ongoing conflict could weigh on domestic economic activity in the period ahead, should the conflict be prolonged,” the bank warned.

CBSL has held rates steady since last May as the nation recovers from a 2022 financial crisis driven by a severe dollar shortage.

Supported by a $2.9 billion program with the International Monetary Fund (IMF), Sri Lanka posted a strong economic recovery last year, growing by 5% and now targeting growth between 4% and 5% in 2026.

An IMF team will arrive in Colombo on Friday for the combined fifth and sixth reviews of the bailout.