Inflation projected to breach 5% target in early 2026: Bloomberg Economics

• Bloomberg Economics warns on further monetary easing

By Nishel Fernando

Inflation in Sri Lanka is expected to make a comeback this quarter and is on a trajectory to exceed the Central Bank of Sri Lanka’s (CBSL) 5 percent target in the first quarter of 2026, according to a new report from Bloomberg Economics.

In light of this forecast and a strengthening growth outlook, the report argues there is no immediate need for the CBSL to cut the interest rates further.

The analysis suggests that further monetary easing is unnecessary at this point. 

“Given the likely growth-inflation mix ahead, we think the CBSL does not need to ease any further,” the report stated. 

It warns that any additional cuts could stimulate excessive demand for imports. A spike in imports, coupled with the resumption of dollar-debt servicing, could drain foreign exchange reserves and put pressure on the rupee.

This economic projection follows the CBSL’s decision announced yesterday to hold its policy rate steady at 7.75 percent, pausing a rate-cutting cycle that had already seen a reduction of 825 basis points. The report views the pause as a sensible move that allows the CBSL to assess the impact of the ongoing trade talks with the US.

The rationale against further easing is supported by several positive economic indicators. The output gap—the difference between the economy’s actual and potential output—has turned slightly positive. The private sector credit is expanding due to the lower lending rates. Further, the tourism sector is rebounding, investor confidence has also improved, as the government sticks to the International Monetary Fund fiscal targets and moreover, the government relief measures in this year’s budget are poised to boost consumption.

However, the outlook could change depending on the US trade policy. The US has flagged a 30 percent reciprocal tariff for Sri Lanka, scheduled to take effect on August 1. If this tariff remains, the report projects the CBSL could be compelled to ease the rates by 25 basis points in September to offset the risks to economic growth.