Monday Oct 19, 2026
Monday Oct 19, 2026
Monday, 19 October 2026 05:17 - - {{hitsCtrl.values.hits}}
Senior Deputy Governor Dr. Chandranath Amarasekara – Pic by Ruwan Walpola
The Central Bank of Sri Lanka (CBSL) has ruled out a lower inflation target for now. It concluded that a goal below 5% would force a prolonged period of tight monetary policy on an economy still recovering from crisis and exposed to repeated external shocks.
CBSL Senior Deputy Governor Dr. Chandranath Amarasekara set out the reasoning behind the new Monetary Policy Framework Agreement (MPFA) in the most detail yet. He said the CBSL had examined whether a target of 2%, 3%, or 4% would suit the current structure of the economy. “The answer was no. We are not there yet,” he said.
The MPFA was signed on 1 October by President and Finance Minister Anura Kumara Dissanayake and CBSL Governor Dr. Nandalal Weerasinghe. It retains the 5% target for quarterly headline inflation for the next three years, with an accountability margin of ±2 percentage points. That margin is the band outside which the CBSL must formally account for missing its target. The CBSL’s announcement at the time listed only broad considerations, including economic structure, historical evidence, and international practice.
The decision followed months of debate. Independent economists and Former Finance Minister Ravi Karunanayake had urged a cut to 2% or a 2%-3% range, arguing that a lower target would better protect household purchasing power and strengthen policy credibility.
Dr. Amarasekara spoke at The Ceylon Chamber of Commerce’s Sri Lanka Economic and Investment Summit (SLEIS) 2026 last week. He was responding to a question on why the CBSL had not chosen a lower target that could bolster both household resilience and investor confidence.
He said inflation averaged 12% from the opening of the economy in 1978 to the end of the conflict in 2009. It averaged 11% up to the formal adoption of inflation targeting in 2023. Inflation briefly fell below 5% after the new Central Bank Act took effect, but the record showed Sri Lanka to be a high-inflation economy, and high inflation tends to be volatile, he said.
“Compared to that history, I think 5% is a good inflation rate. It is an ambitious rate, and compared to global best practices, 5% can also be considered low and stable inflation,” Dr. Amarasekara said.
He said around 15 inflation-targeting central banks have targets of about 2%, but 13 of them are advanced economies and only two are emerging markets. Countries exposed to large energy and food shocks typically set higher targets and wider bands. Sri Lanka belongs in that group, he said, given repeated food, energy, and weather shocks beyond the CBSL’s control. Economies that began with high targets, among them Indonesia, the Philippines, Brazil, and the Czech Republic, took close to 20 years to bring them down to around 2%, he added.
At home, he said inflation currently stood at 8% due to the energy shock. Bringing it down to a lower target would require sacrifice: a strict monetary policy regime, and therefore high interest rates, maintained for longer than usual.
“Is this the time to do it? Not really. The economy is facing multiple shocks, and at the same time, we are still recovering from the crisis,” he said.
The CBSL also tested whether a more ambitious target would be welfare-maximising, meaning whether it would deliver the best overall outcome for households and the economy. It found that it would not.
“We are not inflation nutters. We do not want to reduce inflation to extremely low levels at any cost. That is not how we operate, and that is why we are called a flexible inflation targeter,” Dr. Amarasekara said. “Inflation nutters” is a central banking term for policymakers who pursue low inflation to the exclusion of growth and jobs.
His remarks come as the CBSL projects headline inflation to remain in the high single digits through the first quarter of 2027 before easing towards the target, according to CBSL Economic Research Director Dr. L.R.C. Pathberiya.
Dr. Amarasekara did not rule out a lower target in future. “Gradually, I think it would be good for Sri Lanka to move to a lower inflation target, but not right now,” he said. He added that there was no promise as to when, as any move would depend on further analysis.
