by Our Correspondent in Colombo
The Central Bank of Sri Lanka has sharply increased its Overnight Policy Rate (OPR) by 100 basis points to 8.75% today, signaling growing concern over inflationary pressures and mounting risks to the country’s fragile economic recovery amid escalating tensions in the Middle East.
The decision was announced following a meeting of the Monetary Policy Board held yesterday, where policymakers assessed worsening global and domestic economic conditions. The Board stated that the intensifying conflict in the Middle East has continued to push global commodity prices higher, particularly petroleum prices, placing severe strain on both the global economy and Sri Lanka’s import-dependent economy.
According to the Central Bank, soaring global oil prices forced significant increases in domestic energy prices, contributing heavily to Sri Lanka’s inflation rate rising to 5.4% year-on-year in April 2026. Although officials described the recent inflation surge as largely supply-driven, the Bank warned that stronger domestic demand conditions were also contributing to price pressures.
The Bank pointed to continued expansion in private sector credit, rising import demand fueled by borrowing, and improving economic activity indicators as signs that inflationary pressures could persist in the months ahead. Headline inflation is now expected to remain above the official target of 5% before gradually stabilising over the medium term.
The Central Bank also warned that short-term inflation expectations have increased, although authorities believe longer-term expectations remain anchored around the target range. Officials stressed that preventing inflation expectations from spiraling further was a major factor behind the rate hike decision.
Sri Lanka’s external sector has also come under renewed pressure in recent weeks. While the country recorded a strong economic performance in 2025, the surplus in the external current account remained modest during the first quarter of 2026 due to a widening trade deficit. The increase in fuel import costs and a slowdown in tourism earnings significantly weakened external balances, although workers’ remittances continued to provide support.
Gross Official Reserves stood at USD 6.8 billion at the end of April 2026 despite ongoing foreign debt servicing obligations. The Sri Lankan rupee also faced notable depreciation pressures in recent weeks, mirroring trends seen across several regional currencies, although authorities indicated that market conditions have eased somewhat in recent days.
The Central Bank stated that speculative activity had amplified pressure on the external sector at a time when global geopolitical uncertainty remained elevated. However, officials expressed confidence that expected multilateral financial inflows, together with measures recently introduced by the Government and the Central Bank, would help stabilise the economy in the coming months.
The Board said the latest monetary tightening was necessary to contain inflation risks arising from energy price shocks, expanding credit growth, and increased import demand, while also protecting external sector stability and preserving confidence in the economy.
The Central Bank reiterated its commitment to maintaining price stability and stated that it would continue to closely monitor domestic and international developments before taking further action if required.
The next monetary policy review statement is scheduled to be released on 22 July 2026.
