Though the Central Bank of Sri Lanka announced a rate-hold yesterday (22), Governor Dr Nandalal Weerasinghe cautioned that an inflationary spike is likely in the coming months, driven by the pass-through of recent domestic fuel price adjustments linked to the Middle East conflict.
“Until the next review, we will monitor it closely, the situation and also any emerging risks that we see right now, the re-emerging and increase in fuel price, and how that will affect the local pricing, domestic pricing, and how that is going to translate into inflation, in the short term,” Dr Weerasinghe said.
Referring to the previous 100bps rate hike in May, which is now gradually transmitting through the economy and cooling demand, he added: “What we expect going forward, that strong measure we took last time would be felt, in the next couple of months.”
The Governor noted that fresh energy cost pressures could temporarily push inflation above target before it reverts to 5%. “In terms of inflation of expectation, there could be a little uptick in inflation in the next couple of months, as a result of the pass through of the last price increases. But, it will come back to our target of 5%, after the initial spike that we are going to see in the next couple of months.”
“This time when we discussed at the board level, we wanted to wait and see for a further period until we could see the full transmission of the last monetary policy action into the economy, in terms of demand management policies, as well as to see the impact of supply side administrative side changes and some of the uncertainties that are now emerging, as a result of the Middle East crisis, petroleum prices plus volatility.”
Dr Weerasinghe noted that the rate hike, alongside other Government measures, has seen its intended effect on curbing import demand, while credit expansion has also begun to gradually moderate.
“We have seen some slowing down of some of the excess demand that was generating, especially in terms of demand for imports, as well as credit expansion, which is gradually going down. So we see the result."
“What we see this time, as a result of the proactive measure that we took last time - only about six to seven weeks, we see that there's some impact together with the monetary policy tightening as well as some other measures taken by the Government and the central bank. We have seen some slowing down of some of the excess demand that was generating, especially in terms of demand for imports, as well as credit expansion, which is gradually going down. So we see the result,” he said.
Sri Lanka's outstanding credit extended to the private sector increased by Rs 238.2 billion in May 2026, recording a year-on-year growth of 27.8%, Central Bank data shows.
“The positive side is that we are seeing the foreign exchange part, import-demand has been curtailed, and the exchange rate has been stable for some time, as a result of those measures,” Dr Weerasinghe added.
In June, headline inflation moved upwards to 6.8% in year-on-year terms, driven by elevated domestic energy and food prices. The CBSL noted in its release on the decision for a rate hold, that though the upward movement of inflation is driven by supply-side related pressures, demand conditions have remained steady.