Central Bank keeps rates at 7.75% as growth, inflation outlook firm

• Says main reason for maintaining rates is that previous monetary policy actions are translating into desired objectives in many areas of economy

Dr. Nandalal Weerasinghe PIC BY PRADEEP PATHIRANA

The Central Bank kept its benchmark overnight policy rate unchanged at 7.75 percent at its monetary policy meeting this week, stating the previous easing measures were taking effect and would guide inflation towards its medium-term target of 5 percent by the middle of next year.

Markets had been split ahead of the decision, with some expecting another 25-basis-point cut and others predicting a hold, citing signs of strengthening in the economy.

Governor Dr. Nandalal Weerasinghe said the Monetary Policy Board was convinced that the current level of interest rates was “just about at the right level” to achieve its inflation target.

“The main reason for the Monetary Policy Board to maintain the rates where they are is the fact that the previous monetary policy actions are translating into desired objectives in many areas of the economy,” he said addressing the monetary policy briefing yesterday.

Dr. Weerasinghe highlighted the growth in private sector credit, with provisional August data also showing similar strength. 

“For instance, mainly we saw broad-based growth in the banking sector credit to most sectors of the economy, happening quite well,” he added.

The board had also weighed the pace of credit expansion, which could later pose risks to inflation and external stability. 

“Further, we also decided to make no change to the rate after also looking at the external sector developments, which are at a level that we expected,” Dr. Weerasinghe said.

Sri Lanka’s economy expanded 4.8 percent in the first half of 2025, with the Central Bank projecting continued momentum. The Purchasing Managers’ Indices for manufacturing, services and construction have remained above the neutral level of 50 points, signalling expansion across sectors. Business expectations also remain buoyant, the Central Bank said, helped by lower interest rates, macroeconomic stability and seasonal demand.

Inflation measured by the widely watched Colombo Consumer Price Index was 1.2 percent in August and is projected to climb gradually in the coming months, due to last year’s low base after an 11-month deflationary spell, supported then by repeated cuts to oil, gas and electricity prices. Core inflation, which excludes volatile items such as food and energy and is closely tracked by the policymakers, is also expected to converge around the 5 percent headline target, the Central Bank said.

The Central Bank also pointed to external stability. Despite a wider trade deficit, the external sector has remained resilient, supported mainly by stronger remittances and tourism inflows. Reserve accumulation has slowed, due to the debt service payments and higher imports, particularly following the reopening of vehicle imports earlier this year.

Still, the Central Bank managed to add US $ 1.4 billion to reserves in the first eight months of 2025, with the gross official reserves edging up to US $ 6.17 billion at end-August, from US $ 6.12 billion at end-2024.

“The board will continue to monitor and assess the incoming data on developments on the domestic and global fronts and emerging risks. The board remains prepared to implement appropriate policy measures to ensure that inflation stabilises around the target, while supporting the economy to reach its potential,” the Central Bank said in its announcement.

Pix by Pradeep Pathirana