Overview

The Central Bank of Sri Lanka has decided to keep its Overnight Policy Rate (OPR) unchanged at 7.75%, signaling a cautious but stable monetary stance amid evolving domestic and global conditions.

The decision reflects a balancing act between supporting economic growth and managing inflationary risks, particularly those stemming from geopolitical instability.

Inflation Outlook and Energy Pressures

Sri Lanka’s inflation stood at 1.6% year-on-year in February 2026, significantly below the central bank’s 5% target. This relatively low inflation provides room to absorb shocks from rising global energy prices.

However, escalating tensions linked to the Middle East conflict have driven:

• Increased global oil prices

• Trade disruptions

• Upward adjustments in domestic energy costs

Inflation is now projected to reach the 5% target by Q2 2026, earlier than previously expected, before stabilizing around that level.

Economic Growth and Recovery

The Sri Lankan economy demonstrated resilience, recording 5.0% real GDP growth in 2025, despite disruptions caused by Cyclone Ditwah.

Early 2026 indicators suggest:

• Strong post-disaster recovery

• Rebound in economic activity

• Improved business and consumer confidence

However, prolonged geopolitical instability could dampen this momentum.

External Sector Performance

Sri Lanka’s external sector remains robust, supported by:

• Strong export earnings

• Increased worker remittances

• Growth in tourism

Foreign reserves rose to USD 7.3 billion by end-February 2026, reflecting improved financial stability.

At the same time:

• The Sri Lankan rupee remained largely stable

• Some depreciation pressure emerged following global tensions

Risks and Policy Outlook

Despite positive indicators, risks remain significant:

• Continued volatility in global energy markets

• Potential decline in tourism due to geopolitical uncertainty

• Impact on remittance inflows from affected regions

The Central Bank has emphasized its readiness to act, ensuring:

• Inflation remains anchored around target

• Economic growth is sustained

• Financial stability is preserved

Conclusion

Sri Lanka’s decision to hold interest rates steady reflects a strategic pause in monetary policy. While the domestic economy shows signs of strength, external uncertainties—particularly from global conflicts—continue to shape the policy landscape.

The coming months will be critical as policymakers navigate the intersection of recovery, inflation management, and global economic volatility.