Sri Lanka’s Central Bank is optimistic that the ongoing conflict in the Middle East will subside, which may contribute to reducing inflation to the targeted 5 percent by the second quarter of next year, according to a senior official from the bank.
The Central Bank anticipates that inflation will remain in the high single digits through the first quarter of 2027 before gradually declining to the desired level. As of September, inflation stood at 8 percent, marking a 37-month peak and exceeding the bank’s upper target limit of 7 percent for three consecutive months.
L. R. C. Pathberiya, the head of the Central Bank’s Economic Research Department, shared insights during a media briefing on Wednesday, stating, “We believe that as the Middle East situation stabilizes and considering the base effects from the second quarter onward, inflation will begin to slow down.” He further emphasized that the bank expects inflation to hover around 5 percent starting in the second quarter, progressively trending towards that target.
Despite current high inflation levels, Pathberiya noted that medium-term inflation expectations seem to be consistently aligned with the 5 percent target. Central Bank Governor Nandalal Weerasinghe, in a prior interview with Bloomberg in August, indicated that if oil prices stabilize around $80 per barrel by the end of this year, Sri Lanka could effectively manage its inflation, which he projected to align with the target by the end of the year or early next year.
However, with Brent crude prices surpassing $100 per barrel, the outlook may be affected. Weerasinghe explained that the bank’s baseline forecasts include global oil price predictions from recognized institutional analysts, including projections from JP Morgan and the IMF’s World Economic Outlook, as well as other macroeconomic models. He noted, “These independent forecasts are integrated into our analytical frameworks.”
Furthermore, he acknowledged the inherent uncertainty in predicting global oil prices, stating, “We do not produce our own oil price forecasts; our outlook is based on current independent global evaluations. If these external assumptions change, our domestic projections will adapt accordingly.”
