Central Bank hikes key interest rates amid rising inflation pressures

Colombo, May 26 (Daily Mirror) - The Monetary Policy Board of the Central Bank of Sri Lanka (CBSL) has decided to increase the Overnight Policy Rate (OPR) by 100 basis points, bringing it to 8.75%. Following this adjustment, the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR)—which are linked to the OPR with predetermined margins of $\pm$ 50 basis points—have been increased to 8.25% and 9.25%, respectively. The decision comes after a careful evaluation of evolving domestic and global macroeconomic conditions.

The tightening of the monetary policy stance is primarily driven by mounting inflationary pressures. Heightened geopolitical tensions in the Middle East have kept global commodity prices, especially petroleum, elevated. This has led to sharp upward adjustments in domestic energy prices, pushing Sri Lanka’s year-on-year headline inflation to 5.4% in April 2026. While the recent spike is largely supply-driven, strengthening domestic demand—evidenced by continued credit expansion, credit-driven imports, and robust economic activity—has further accelerated short-term inflation expectations.

The external sector has also faced amplified headwinds in recent weeks. A widening merchandise trade deficit, driven by increased fuel import costs and a slowdown in tourism earnings, resulted in a modest external current account surplus for the first quarter of 2026. Additionally, speculative activities led to notable depreciation pressures on the Sri Lankan Rupee, though conditions have since stabilized. Despite these pressures and ongoing foreign debt servicing, Sri Lanka’s Gross Official Reserves stood at a resilient USD 6.8 billion by the end of April 2026, a figure that includes a swap facility from the People’s Bank of China.

Looking ahead, headline inflation is projected to remain above the central bank's target of 5% in the near term before stabilizing. To counter potential second-round effects on inflation from energy price hikes and unchecked private sector credit growth, the Board deemed a restrictive policy stance necessary to maintain long-term domestic price stability. The Central Bank noted that upcoming multilateral inflows and government stabilization measures are expected to support the external sector, adding that it will continue to monitor incoming data ahead of its next scheduled monetary policy review on July 22, 2026.