CBSL keeps policy rates unchanged

Central Bank Governor Dr. Nandalal Weerasinghe - Pic by Lasantha Kumara 

• Central Bank Governor Dr. Nandalal Weerasinghe says rates could be eased if outlook shifts post-US tariff talks, but sees no immediate need to change current stance
• Notes leading indicators suggest continued growth momentum in Q2; expresses confidence in over 3% GDP growth over next three years
• Says 16.1% credit growth is part of post-crisis recovery, with no signs of economic overheating
• Notes credit is shifting from SOEs to private sector, helping boost private investment

By Charumini de Silva

The Central Bank of Sri Lanka (CBSL) yesterday announced an unchanged stance on policy rates at 7.75% following the Monetary Board Review on Tuesday, after assessing both domestic and global developments. 

The Board is of the view that the current monetary policy stance will help steer inflation towards the target of 5% in the period ahead, while supporting growth.

“The decision to maintain the current rates is based on the progress seen so far this year and the stable outlook 

going forward. 

As of now, we are moving in the right direction,” CBSL Governor Dr. Nandalal Weerasinghe said during the post-Monetary Policy Review meeting media briefing yesterday. 

He added that further easing of rates is still possible as the country awaits the outcome of tariff talks with the US. “If there is a change in the expectations, we have room to relax policy rates. Since our current expectations are in line with the previous review, there was no need to make a change. If expectations shift, we do have space to act; but for now, we maintain our stance,” Dr. Weerasinghe clarified.

The CBSL Governor also explained that external risks like the US tariff still remain uncertain as negotiations are ongoing and positions are changing rapidly. “If there is an impact, we will manage it in the short term and prepare mitigation strategies for the long term,” he added.

As per the CBSL, movements in the Colombo Consumer Price Index (CCPI) reflected a further easing of deflationary conditions as anticipated. Inflation is projected to turn positive this quarter and steadily increase towards the target of 5% thereafter. Core inflation will continue to gradually accelerate in the coming months, reflecting the steady recovery in the economy’s demand conditions. 

“The inflation path—both the actual outcomes and the projections—has remained largely unchanged. Inflation is moving towards our target range of 5%. At the same time, credit is flowing into the economy, supporting growth. It is following expected trends and we haven’t seen any major surprises—it is progressing in the right direction for us to see a growth of over 3% of GDP,” Dr. Weerasinghe said.

The CBSL statement noted that the economy recorded a firm growth of 4.8% in the first quarter of 2025, and the leading economic indicators suggest this growth momentum will continue in the near term. Monetary conditions continued to ease, supporting the rebound in domestic economic activity. Most market interest rates have declined further in response to the recent policy rate reduction. The expansion of credit to the private sector has remained robust at 16.1% year-on-year and broad-based so far in 2025, and private sector credit expansion is expected to continue.

Noting that the CBSL does recognise there are some uncertainties ahead, particularly geopolitical and economic developments globally, which could have an impact, Dr. Weerasinghe said they will need to wait and assess whether those factors will significantly affect our economy and outlook. 

He asserted that there is no concern amid the credit expansion. “We don’t see signs of overheating. This credit growth comes after a sharp contraction following the crisis. What we witness is a recovery. So, this growth is healthy and broad-based,” he said.

In addition, the Governor said there has been a shift in credit allocation from State-owned enterprises (SOEs) to the private sector, as large public sector repayments have freed up space.

The CBSL also noted that the external sector continued to be resilient amidst a widening trade deficit. Inflows from tourism earnings and workers’ remittances improved further. Gross official reserves were maintained at healthy levels amidst debt service payments. Reserve buildup efforts continue, with regular net foreign exchange purchases by the CBSL. The fifth tranche of the International Monetary Fund (IMF)-Extended Fund Facility (EFF) was received in early July 2025.

Globally, policy uncertainty has intensified due to the evolving trade landscape and recurring geopolitical conflicts. The Board will carefully monitor any realisation of global uncertainties and assess incoming data on domestic developments. The Board is prepared to take appropriate policy measures to ensure that inflation stabilises around the target, while supporting the economy to reach its potential.