The Central Bank of Sri Lanka (CBSL) has released its first Monetary Policy Report for 2026, providing forward-looking insights on inflation, economic growth, and potential risks to the economic outlook.
According to the report, after an eleven-month deflationary period ending in August 2025, inflation returned to positive territory.
The CBSL projects that inflation will gradually move toward the 5% target by the second half of 2026, supported by a gradual recovery in domestic demand, the normalization of energy and transport costs, and relatively elevated food price volatility.
The report notes that core inflation is expected to stabilize in line with the headline inflation target, and the overall balance of risks to inflation is assessed as broadly neutral in the near to medium term.
The CBSL stated that it maintained an accommodative monetary policy stance throughout 2025, supported by subdued inflationary conditions and a benign inflation outlook.
The report highlights that short-term money market interest rates experienced temporary tightening during the latter part of 2025, but this easing occurred due to improved liquidity conditions and a more even distribution of funds among banks.
The report further notes that the overall market interest rate structure adjusted downward, and credit flows to the private sector continued to expand, reflecting improving economic activity and increased vehicle imports.
According to the CBSL, the external sector demonstrated resilience, with the current account estimated to have recorded a surplus for the third consecutive year.
The report states that the Sri Lanka rupee depreciated by 5.6% against the USD during 2025, while remaining broadly stable into early 2026. Despite servicing the highest post-crisis external debt obligations, gross official reserves increased by the end of 2025, supported by net foreign exchange purchases by the CBSL and inflows from multilateral institutions.
The CBSL indicated that fiscal consolidation measures continued to strengthen government finances during 2025, complemented by revenue-based initiatives.
The report highlights that following the disruptions caused by Cyclone Ditwah, the government implemented relief measures and supplementary budgets to restore affected infrastructure and support economic recovery.
According to the CBSL, the economy expanded robustly during the first nine months of 2025. While Cyclone Ditwah temporarily slowed activity in late 2025, timely policy interventions are expected to facilitate recovery, generate positive spillovers across sectors, and reinforce overall economic momentum.
The report notes that leading indicators point to continued resilience, with credit expansion and accommodative monetary conditions supporting sustained growth. Nevertheless, external challenges, including global trade frictions and heightened geopolitical uncertainties, remain key risks to the outlook.
Additionally, the report includes a box article, “Digging Deeper into the Recent Deflation Episode in Sri Lanka”, which provides a detailed analysis of the causes behind the deflation observed between September 2024 and July 2025.
Read the full report: https://www.cbsl.gov.lk/en/publications/economic-and-financial-reports/monetary-policy-reports/monetary-policy-report-2026-february
