Sri Lanka's central bank likely to hold rates to control inflation

COLOMBO: Sri Lanka’s central bank is expected to keep its key interest rate unchanged on Wednesday, a Reuters poll showed, as policymakers weigh rising inflation due to volatile energy prices.

All 13 economists and analysts polled by Reuters expected the Central Bank of Sri Lanka (CBSL) to leave its policy rate at 8.75% at its meeting on Wednesday, after a 100-basis-point increase in May, its biggest since March 2023.

Consumer inflation rose to 6.8% in June from 2.2% in March, while foreign exchange reserves fell 6.3% to $6.4 billion, latest data showed.

CBSL has set an inflation target of 5% for this year.

“As global oil prices have eased from previous highs and the effects of previous tightening measures are yet to fully transmit through the economy, the need for further policy action remains limited,” said Dimantha Mathew, head of research at First Capital.

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“With credit growth expected to moderate, liquidity conditions stabilising, and market rates already elevated, additional tightening could unnecessarily weigh on economic activity.”

Sri Lanka, which relies entirely on imported fuel, has been hit by an energy shock tied to the Iran war, forcing a 40% fuel price increase, rationing and public holidays on Wednesdays.

The International Monetary Fund approved a $700 million tranche under its $2.9 billion programme after the May rate increase.

The global lender expects Sri Lanka’s economy to grow 3% this year after 5% growth in 2025.