The Central Bank of Sri Lanka (CBSL) has maintained its Overnight Policy Rate at 8.75 percent, noting that the effects of the monetary tightening introduced in May 2026 and other policy measures had largely materialised, while inflation is expected to remain elevated through the first quarter of 2027.
Following its Monetary Policy Board meeting on 29 September, the CBSL said headline inflation is projected to remain in the high single digits through the first quarter of 2027 before gradually easing towards the 5 percent target.
Headline inflation reached 8.0 percent in August as higher energy costs continued to pass through multiple sectors of the economy. Core inflation also increased due to spillover effects from higher energy prices, although medium-term inflation expectations remained broadly anchored around the target, according to the CBSL.
The Monetary Policy Board considered the impact of previous policy tightening alongside uncertainties arising from tensions in the Middle East and potential risks associated with El Niño conditions.
“The board paid particular attention to the effects of the proactive monetary policy tightening in May 2026, alongside the other measures that had already materialised to a large extent,” the CBSL said.
The Central Bank also reiterated that it remains prepared to take further action should inflationary pressures intensify or inflation expectations show signs of moving away from the target.
“Should the inflationary pressures intensify or inflation expectations show signs of de-anchoring, the CBSL stands ready to take timely and appropriate measures to ensure that inflation stabilises around the target, while supporting the economy to operate around its potential over the medium term,” it said.
Sri Lanka’s economy expanded by 4.7 percent year-on-year during the first half of 2026. Leading indicators pointed to continued economic momentum, although global and climate-related uncertainties could weigh on the outlook.
Private-sector credit growth has been gradually moderating in response to recent policy measures, the CBSL said, while noting that credit flows are expected to remain sufficient to support economic activity.
The inflation outlook continues to face upside risks from a further escalation or prolonged geopolitical tensions. Such developments could push domestic energy, transport and fertiliser costs above current expectations.
More severe weather conditions associated with El Niño could also affect agricultural production. In addition, a greater depreciation of the rupee resulting from adverse market sentiment or external shocks could contribute to further price pressures.
Conversely, larger-than-expected declines in global energy and commodity prices, or a smaller-than-anticipated impact from El Niño conditions, could result in lower inflation than currently forecast. The CBSL noted that the outlook remains subject to elevated uncertainty.
The external sector continued to demonstrate resilience, with the current account estimated to have recorded a surplus in August after four consecutive months of deficits. Moderating merchandise imports, together with improved tourism earnings and workers’ remittances, supported the turnaround.
Gross official reserves increased to US$6.9 billion by the end of August, supported by the CBSL’s net foreign exchange purchases. The reserves figure includes the swap facility from the People’s Bank of China.
The rupee appreciated against the US dollar during July and August before recording mixed movements in September. The CBSL noted that the recent sovereign rating upgrade was expected to provide further support to market sentiment.
Meanwhile, Colombo’s inflation remained at 8.0 percent in September for the second consecutive month, although the composition of price pressures indicated that the increase in the cost of living was extending beyond food into transport, housing and services.
According to data from the Census and Statistics Department, the Colombo Consumer Price Index (CCPI) increased marginally by 0.1 percent month-on-month to 209.1 points in September from 208.8 in August. This indicated relatively contained monthly price movements despite the elevated annual inflation rate.
Food inflation accelerated to 8.7 percent year-on-year in September from 8.5 percent in August, while non-food inflation remained at 7.7 percent. Headline inflation was unchanged at 8.0 percent.
Non-food items accounted for 5.16 percentage points of September’s annual inflation, compared with 2.83 percentage points from food, indicating that the broader increase in prices was less dependent on short-term movements in agricultural commodities.
Transport was the largest non-food contributor, accounting for 2.38 percentage points of annual inflation. Petrol alone contributed 1.31 percentage points, while diesel, bus fares, vehicle prices, servicing costs and school transport also contributed to the increase.
Housing, water, electricity, gas and other fuels accounted for another 1.22 percentage points, with housing rents, LPG and electricity among the main contributors. Restaurants and hotels added 0.74 percentage points, while education contributed 0.31 percentage points.
Despite these annual pressures, the September data showed limited evidence of a fresh acceleration in prices during the month. Food prices increased by 0.15 percent month-on-month, while non-food prices rose by just 0.04 percent.
Fresh fruits, big onions and milk powder were among the main upward contributors to food prices, while lower prices for sea fish, green chilli and vegetables provided some relief.
Transport prices also declined during the month, largely due to lower petrol prices, helping to contain the overall index despite increases in education, healthcare and restaurant-related costs.
The annual comparison, however, continued to show substantial price increases. Selected retail prices indicated that petrol was around 34 percent higher in September 2026 than in September 2025, while diesel prices were also approximately 34 percent higher. Big onion prices increased by 90 percent, dried chillies by 61 percent and eggs by 36 percent over the same period.
The gap between relatively subdued monthly price movements and elevated annual inflation partly reflects the significant increase in the overall price level over the past year.
Colombo’s inflation rate stood at 1.5 percent in September 2025 before accelerating through 2026. It increased from 2.3 percent in January to 5.4 percent in April, 6.8 percent in June and 7.3 percent in July, before reaching 8.0 percent in August and remaining at that level in September.
The 12-month moving average also reflected the accumulation of price pressures, with inflation rising to 4.5 percent in September from 3.9 percent in August. The corresponding food inflation measure increased to 3.7 percent from 3.2 percent, while the non-food measure rose to 4.8 percent from 4.3 percent.
Image Disclaimer: Images used in this article are the property of their respective copyright holders and rightful owners. No ownership is claimed over the images.
