Post by : Shakul

Sri Lanka’s central bank has kept its benchmark policy rate unchanged at 7.75 per cent, citing concerns that rising global energy costs and uncertainty from the ongoing Middle East conflict could threaten economic stability.

The Central Bank of Sri Lanka (CBSL) made the decision on Wednesday, in line with economists’ expectations from a Reuters poll, as inflation remains relatively low but external risks mount due to the U.S.-Israeli war involving Iran.

CBSL Governor P. Nandalal Weerasinghe said at a press briefing that the economy has “good space to absorb shocks both in terms of inflation and foreign reserve buffers,” which currently stand at about $7.3 billion. He added that there were no immediate threats to financial stability, though the bank would review inflation projections if uncertainty persists.

Inflation in Sri Lanka is now expected to align with the central bank’s target of 5 per cent by the second quarter of 2026, following a substantial fuel price increase of about 35 per cent this month — a move aimed at easing pressure on government finances and reducing fuel subsidies.

The CBSL has maintained its policy rate at 7.75 per cent since May 2025 as the economy continues its recovery from the severe 2022 financial crisis triggered by a foreign exchange shortage. The country’s rebound last year was supported by a $2.9 billion IMF program, helping Sri Lanka achieve around 5 per cent economic growth in 2025, with a target of 4–5 per cent in 2026.

Analysts say that while higher energy prices could push inflation upward, underlying economic momentum — bolstered by ample domestic liquidity and credit — may help cushion the impact. Anjali Hewapathage, deputy head of macroeconomic research at Colombo’s Frontier Research, noted that the economy has room to absorb disruptions through June amid solid financial conditions.

An IMF mission is scheduled to arrive in Colombo to conduct combined fifth and sixth reviews of Sri Lanka’s bailout program, underscoring continued engagement with international partners to ensure macroeconomic stability.

Despite the decision to hold rates, the central bank warned that prolonged geopolitical turmoil could weigh on domestic activity if external shocks intensify.

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