Sri Lanka central bank holds key rate at 8.75%

COLOMBO: Sri Lanka’s central bank kept its key policy rate unchanged at 8.75% on Wednesday ahead of the island nation’s budget in mid-November.

The decision was in line with market expectations after Sri Lanka raised its policy rate by a steep 100 basis points in May to steady its currency and protect foreign exchange reserves amid the US-Israeli war on Iran.

Inflation rose to a three-year high of 8% in August from 7.3% in July, according to the latest data.

Higher energy costs from the war have pushed Sri Lanka, which imports all of its oil, to ration fuel and increase prices by about 35% since March.

Headline inflation is projected to remain in the high single digits through the first three months of 2027 before easing towards a 5% target, the Central Bank of Sri Lanka said.

“In spite of the current spike in inflation, medium-term inflation expectations remain broadly anchored around the target,” the central bank said in a statement.

Despite ongoing Middle East tensions, Sri Lanka’s remittances and tourism earnings are resilient with the current account estimated to have recorded a surplus in August after four consecutive months of deficits, it added.

“Looks like tightening early has resulted in demand collapsing, stopping runaway inflation and bringing the current account to positive territory,” said Udeeshan Jonas, chief strategist at equity research firm CAL Group.

“So it doesn’t look like further tightening is needed if the current conditions continue.”

Sri Lanka is currently engaged in talks with the International Monetary Fund on the seventh review of its Extended Fund Facility program, which could see the release of about $330 million in November following the national budget presentation in parliament.

The global lender has predicted Sri Lanka’s economy will grow by 3% this year.

The island nation posted growth of 4.7% in the first six months of this year.