Sri Lanka Central Bank holds policy rate at 7.75 percent

The Central Bank of Sri Lanka (CBSL) opted to maintain its overnight policy rate at 7.75% during its latest meeting on Wednesday. This decision reflects a cautious monetary stance as the nation navigates economic uncertainty fueled by rising energy prices and geopolitical volatility in the Middle East.

The hold was widely anticipated by analysts, matching a recent Reuters poll. Policymakers noted that while inflation remains low, the potential for external shocks remains a primary concern, particularly regarding the ongoing conflict involving the United States, Israel, and Iran.

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

Domestic authorities are currently managing the fallout from a 35% increase in fuel prices implemented earlier this month. Despite this spike, the central bank expects inflation to stabilize and reach its 5% target by the second quarter of 2026. The bank has kept interest rates steady since May of last year to support a fragile recovery following the severe 2022 financial crisis, which was characterized by a critical shortage of foreign exchange.

The domestic economy showed resilience last year, posting a 5% growth rate. Officials are now targeting a growth range of 4% to 5% for the 2026 fiscal year. This recovery is underpinned by a $2.9 billion support package from the International Monetary Fund (IMF).

Looking ahead, an IMF delegation is expected to arrive in Colombo this Friday. The visit will focus on the combined fifth and sixth reviews of the current bailout program, which remains vital for the country's long-term fiscal stability.