COLOMBO: Risks to inflation in Sri Lanka and real economic growth projections are skewed to the upside over the medium term, the central bank said in a monetary policy report on Monday.

Overall, the central bank expects a further downward adjustment in market interest rates, particularly lending interest rates, which show signs of downward rigidity, the report said.

Soaring inflation has battered the Indian Ocean island’s economy for more than a year after a severe foreign exchange crunch set off Sri Lanka’s worst financial crisis in seven decades.

Sri Lanka’s economy contracted by 7.8% last year and is expected to have shrunk in the months between April to June but is forecast to gradually recover in the second half of 2023, according to the Monetary Policy Report.

“….overall slowdown in economic activities suggest that the economy may record a contraction in Q2 2023, although at a lower magnitude than in the first quarter,” the report said.