In addition to global external headwinds that have led to sharp upward adjustments in domestic energy prices and inflation, the Central Bank’s decision to increase the Overnight Policy Rate (OPR) by 100 basis points to 8.75% is meant to curtail credit-driven demand within the Sri Lankan economy, alongside its recently imposed vehicle import surcharge and tightened loan to value ratios, Central Bank Governor Dr Nandalal Weerasinghe said yesterday (26).
Announcing the adjusted OPR to the public, Dr Weerasinghe said: “This is the main reason for this monetary policy measure we have taken and also some other measures Government took, crucial to what we see in the supply side shock. We have seen a kind of a demand also have been moving in tandem with the recent trends, this has to be curtailed to a certain extent.”
Sri Lanka had spent more than $ 2 billion on vehicle imports in 2025 and was anticipated to spend another $ 1.5 billion this year, even amidst global volatility. On 15 May, in order to curb demand and excess expenditure of foreign exchange, amidst the externalities that have driven Sri Lanka’s domestic prices upwards and dependency on reserves – the Government announced a 50% import duty surcharge on vehicle imports for the next three months, effective on the next day.
This led to a dramatic spike in Letters of Credit (LCs) issued, with a value of $ 23.71 million in a single day before the enforcement. According to publicly available data, between the date of announcement and 19 May, Sri Lanka spent $ 56.59 million on LCs.
By 21 May, the Sri Lankan Rupee fell to its lowest in three years, as the Central Bank’s transfer rate dropped to Rs 354.03 per dollar, sharply down from Rs 331.15 seen on 15 May, the day of the announcement. Following a nine-day plummet, the Central Bank informally capped the dollar at Rs 330.
Sri Lanka has since also introduced tighter loan-to-value ratios for motor vehicle loans and gold-backed lending, in an attempt to curb credit-driven growth.
“This policy measure will certainly help the economy to adjust and face, maintain the stability going forward. Our expectation is that the country will still be growing at a reasonable rate going forward. There was some depreciation in the currency, that adjustment has now stabilised, which will maintain. That will also help us to maintain inflation around target levels going forward,” Dr Weerasinghe said, explaining the rationale behind the rate hike.
Addressing wider concerns on the rate hike leading to a potential contraction in the economy, he added: “That doesn’t mean that there is a contraction, this will only be a slowing and curtailing of the excess demand which is to also prevent any overheating of the economy and balance both the inflation side and demand side, and also growth and inflation.”
Referencing the Central Bank’s intervention of capping the dollar and the subsequent rupee appreciation, he said: “As we have already seen, some of the measures we have taken have helped to stabilise the currency and that will continue to be the case going forward with this measure. And also going forward, if we are going to see any instability, a lot of other instruments are also with us. If needed, we can also use those instruments, and measures to curtail any excess demand and undue pressures, especially when there is an external shock, there could be pressures on the external side in terms of excess demand for imports, excess demand for foreign exchange. This is the instrument that will help stabilise the economic situation and the main one is to maintain stability, especially overall macroeconomic stability, especially price stability. That’s the basic rationale for the change.”
The Monetary Policy Board decided to increase the Overnight Policy Rate (OPR) by 100 basis points to 8.75%. The margins linked to the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR), which are set at 50 basis points above and below the OPR, remain unchanged. Accordingly, the SDFR is now at 8.25% and the SLFR is at 9.25%. The Statutory Reserve Ratio (SRR) remains unchanged at 2.0%. The Board arrived at this decision after carefully considering the evolving conditions and outlook on the domestic and global fronts.
Headline inflation increased to 5.4% in April, up sharply from 2.2% in March. Both headline inflation and core inflation increased substantially in April, mainly due to the increase in global prices and its spillover effects in the domestic market. Headline inflation is likely to remain above the target of 5% in the near term, before easing and stabilising around the inflation target. The Central Bank expects some increase in the period ahead, and then stabilisation to the inflation target. This recent increase in inflation is largely supply-side driven. However, the Central Bank also noted that demand conditions in the economy have strengthened, as shown by some indicators – mainly continued credit expansion and credit-driven imports, as well as leading indicators of economic activity.
Though inflation expectations in the short term have also increased to a certain extent, medium-term inflation expectations remain well anchored. Market interest rates have also tightened in recent months, and the Central Bank has activated liquidity absorption through open market operations after the festive season in April.