Central Bank of Sri Lanka is more likely to maintain its Overnight Policy Rate at 8.75% at the next monetary policy meeting today (21), as the effects of the previously announced hike are yet to take effect in the broader economy, First Capital Research projected in its pre-policy report released last week.
“We assign a 70% probability for a rate hold, as global oil prices have eased from previous highs and the effects of previous tightening measures are yet to fully transmit through the economy,” the report said. Yesterday, however, Brent crude traded at $ 90 a barrel, driven by the renewed escalation in military action between the United States and Iran within the Middle East.
Addressing the previous rate hike decided on by the CBSL, the research unit said: “The unexpected 100bps policy rate hike in May-26 was significant, and its full effects are unlikely to be reflected in the economy yet, given that monetary policy typically operates with a lag of around 6+ months.”
Notably, prior to the tightening of monetary policy, the unit noted that private sector credit had seen a 27.8% year-on-year growth and a 45.4% year-on-year growth in Sri Lanka’s import bill in May.
“Given these transmission lags, an additional rate hike at this stage would be premature. Allowing more time for the previous tightening to work through the economy would provide a clearer assessment of its effectiveness while reducing the risk of overtightening,” the unit noted.
Following the 27.8% YoY growth seen in credit in May, it noted that the sector is to moderate in performance for the remainder of the year, as the rate hike is to take effect. “Although private sector credit growth remained elevated at 27.8% YoY in May-26, it is expected to moderate in the coming months as the effects of recent monetary policy tightening gradually dampen borrowing demand.”
FCR also noted that liquidity conditions are to stabilise without further policy intervention, as private sector credit is to moderate.
It further noted that the observed decline in the M2b multiplier from 8.86x in April 2025 to 8.42x in April 2026 indicates some moderation in money creation within the banking system.
The unit noted a strengthening in foreign investor appetite for LKR-denominated government securities in recent weeks, with net inflows of Rs 32.0 billion ($ 97.1 million) seen in the week ended 9 July, raising foreign holdings to Rs 168.9 billion, the highest level since August 2023. “This has reversed earlier outflows, resulting in a net inflow of $ 83.4 million for the year to date,” FCR said.
The recovery of the rupee from around LKR 354.0/USD in May to approximately LKR 330.0/USD has also supported renewed investor confidence, it noted. “These developments indicate that foreign participation is improving without additional monetary tightening, reducing the need for a policy rate hike to attract capital inflows or support external stability.”