CB keeps policy rate unchanged at 7.75% as inflation outlook holds

Dr. Nandalal Weerasinghe PIC BY PRADEEP PATHIRANA

The Central Bank yesterday left its key policy rate, the Overnight Policy Rate (OPR), unchanged at 7.75 percent, while signalling an accommodative monetary stance, as the Monetary Policy Board is of the view the current policy setting is appropriate to steer inflation towards its medium-term target of around 5 percent.

At its first monetary policy meeting for the year, the Central Bank maintained the OPR at 7.75 percent, with a 50-basis-point margin on either side for the standing facilities for the banks.

The statutory reserve ratio for the banks was also kept unchanged at 2 percent.

The Central Bank has not cut the policy rates since May 2025, when it reduced the OPR by 25 basis points to accelerate the return of inflation, as the economy was experiencing a phase of deflation.

“The board arrived at this decision after carefully considering the evolving developments and the outlook on the domestic front and global uncertainties. The board is of the view that the current monetary policy stance will support steering inflation towards the target of 5 percent,” the Central Bank said in its statement. “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,” it added.

The Central Bank said the slight acceleration in inflation in December 2025 was driven by higher food prices, reflecting the supply-side and supply-chain disruptions caused by the floods in early December.

Meanwhile, at the monetary policy briefing yesterday, responding to the questions on the economic impact of the floods, Central Bank Governor Dr. Nandalal Weerasinghe said there would be no long-term impact on economic growth from Cyclone Ditwah, with the effects expected to be short term.

“There could be a slowdown in GDP growth in the fourth quarter of 2025 compared to what was expected. We are waiting for the numbers. For example, in the first three quarters, there was a growth of nearly 5 percent,” he said.

“There could be a slightly lower growth in the fourth quarter of 2025 but there could be a positive impact on economic growth in 2026, due to the additional fiscal stimulus, including the additional Rs.500 billion recently approved by Parliament. Once this spending begins, it could generate additional economic activity and support growth.”

Dr. Weerasinghe said that based on the current indicators, growth is expected to remain broadly on the same trend in the short term, as seen in the fourth quarter of 2025.

“However, it will return to the same path going forward,” he said.

Pix by Pradeep Pathirana