The Monetary Policy Board convened yesterday and opted to keep the Overnight Policy Rate (OPR) unchanged at 8.75%. This decision was made after a thorough assessment of both domestic and international economic conditions and forecasts.
Recent escalations in Middle Eastern tensions have led to an increase in global commodity prices, particularly affecting oil. These changes are anticipated to negatively impact global economic growth, which could have repercussions for the domestic economy through various channels.
In June 2026, year-on-year headline inflation rose to 6.8%, driven primarily by rising domestic energy and food costs. It is projected that headline inflation will exceed the target of 5% in the short term before gradually aligning with the target level. Core inflation is also expected to rise and hover around the headline inflation target. Despite the immediate increase in inflation rates, expectations for inflation remain stable around the targeted level over the medium term. While the surge in headline inflation is mainly due to supply constraints, demand dynamics within the economy have also improved. Nonetheless, the tightening of monetary policy initiated in May 2026, along with other government and central bank measures, is expected to slow credit growth and mitigate demand pressures moving forward.
The external sector, affected by the conflict in the Middle East, has shown some signs of relief, although the overall outlook remains precarious due to ongoing tensions. Since April 2026, the external current account has been in deficit, primarily due to increased fuel import expenses that have widened the merchandise trade deficit and a slowdown in tourism revenues. In the future, it is anticipated that import demand, including for vehicles, will decline in light of recent policy actions. Conversely, remittances from workers have remained robust in 2026. By the end of June 2026, Gross Official Reserves amounted to USD 6.45 billion, amidst ongoing foreign debt service obligations. The Sri Lankan rupee has shown some stabilization recently, reflecting the effects of the implemented policy measures.
The Central Bank will continue to monitor both domestic and global economic developments for any emerging risks. It is anticipated that the effects of previous monetary policy tightening will begin to manifest in the economy in the near future. The Central Bank is prepared to implement necessary actions to ensure that inflation stabilizes around the 5% target while also fostering the economy’s potential growth in the medium term.
Source: Financial Chronicle Biz English | Sri Lanka Business News.
