Sri Lanka’s economic growth is expected to slow in the second half of 2025, with high prevailing taxes limiting consumer demand and limited government capital spending, prompting the Central Bank to cut rates by 25bps in November, First Capital Research said.

“Considering the high prevailing taxes, which are limiting consumer spending, coupled with limited capital expenditure by the government, we believe that the economic growth may ease towards the second half of 2025,” it said in a fixed income outlook report.

Moreover, it said that the easing of growth is also be visible from the slow expansion in the M2b money multiplier, which currently hovers around 9.01x in July 2025, and the slowness is expected to be carried forward towards the end of 2026, with US tariffs expected to reduce spending and limit growth in 2026.

“We believe that the Central Bank may look to relax OPR further by 25bps at the November policy review,” First Capital said, adding that the lowered rates are expected to continue during the next 12-month period, with limited pressure coming towards rising rates.

Further, it said that liquidity is expected to remain elevated, lowering pressure on interest rates. 

“With the expected easing of pent-up demand from vehicle imports and slight slowness in credit thereafter, liquidity in the banking system is expected to hover between Rs 150-200 billion in the next 12 months,” the report said.

Also, the increased tax collection and lower spending, which is expected to lead to a primary surplus, is expected to release the pressure on liquidity in the near term.