• Deputy Minister says core inflation remained at low positive levels

Sri Lanka's earlier inflation targets were missed largely due to supply-side adjustments, with core inflation remaining at low positive levels throughout the period as aggregate demand recovered only gradually, Deputy Minister of Finance and Planning Anil Jayantha Fernando said in parliament yesterday (25).

“The inflation dynamics during this period were influenced more by supply-side factors, amidst a low recovery of aggregate demand,” Fernando said. “Core inflation, which reflects underlying demand conditions, remained at low positive levels throughout the period, indicating that demand-side pressures moderated but did not fully dissipate.”

He noted that economic activity continued to recover following the crisis, with real GDP growth, improving labour market conditions, and expanding private sector credit pointing to strengthening consumption and investment. “The period of below-target inflation largely reflected temporary supply-side adjustments, while aggregate demand has been gradually strengthening alongside recovering economic activity,” he added.

Though Sri Lanka’s headline inflation entered into a positive territory in August of 2025, monthly headline inflation continued to average 2.6% percentage points below the inflation target set by the CBSL, until April of 2026, when inflation hit 5.40%. COPF Chairperson Dr Harsha de Silva said that Sri Lanka has missed its inflation target for six consecutive quarters, when the issue was raised during a COPF meeting in January of this year.

“The Central Bank reviews and updates the assumptions underlying its medium-term inflation projections in each forecast round to reflect newly available data and evolving macroeconomic conditions,” Fernando explained.

During the meeting held in January, Central Bank of Sri Lanka Deputy Governor C Amarasekara informed the Committee that Sri Lanka’s inflation targets rely on the Household Income and Expenditure Survey (HIES) data from 2019, though the country’s spending patterns have weathered the economic impact of the Covid-19 pandemic and an economic crisis in 2022.

Fernando maintained in parliament that the Central Bank uses a semi-structured open-economy quarterly projection model (QPM) that bridges the gap between reality and theoretical aspects.

“Earlier projections had anticipated a faster return of inflation to the 5% target. However, subsequent data and developments, including adjustments in administered prices – particularly energy and fuel prices – global commodity price movements, and evolving cost structures, resulted in inflation remaining lower for longer than expected,” he said.

“According to projections presented at the January 2026 monetary policy round, inflation is expected to gradually accelerate and move towards the 5% target by the second half of 2026.” Fernando cautioned, however, that the realised path may deviate due to evolving global developments, including the potential spill-over from the Middle East crisis.