CBSL releases key report: Sees inflation reaching 5%, 2026 growth at 4-5%

• Headline inflation projected to move towards and stabilise at 5% target in 2H
• Real GDP growth for 2025 likely around 4.5% amid Ditwah disruptions
• Core and energy inflation expected to firm; food inflation elevated near term

The Central Bank of Sri Lanka (CBSL) yesterday released its bi-annual Monetary Policy Report – February 2026, setting out updated baseline projections for inflation and economic growth following the January 2026 monetary policy round.

According to the report, headline inflation will continue to accelerate and move towards the target of 5% in second half of the year, supported by gradually strengthening demand conditions. Over the medium term, inflation is expected to stabilise around the 5% target with the implementation of appropriate policy measures.

The Central Bank noted that since returning to positive territory in August 2025 after a prolonged period of deflation, inflation has been increasing gradually. Energy and transport inflation, which remained in deep deflation for nearly two years, has eased and is expected to turn positive in the near-term, partly reflecting base effects. However, the outlook remains sensitive to global fuel prices and geopolitical developments.

Core inflation is projected to gradually increase and stabilise at a level consistent with the headline inflation target, reflecting strengthening domestic demand and imported cost pressures linked to global food prices and inflation trends.

Volatile food inflation is expected to remain elevated in the near term, with the Central Bank cautioning that Cyclone Ditwah-related disruptions to agricultural output could exert upside pressure. Nevertheless, restoration and re-cultivation efforts are expected to help contain the impact. The trajectory of food prices remains subject to considerable uncertainty amid recurring extreme weather events.

On growth, the report states that real GDP growth moderated in the fourth quarter of 2025 compared to the first three quarters, largely due to Cyclone Ditwah-related disruptions. As a result, real GDP growth for 2025 is likely to be around 4.5%.

Looking ahead, economic growth for 2026 is currently projected to be in the range of 4% to 5%, continuing the recovery momentum recorded over the past two years. In the near term, eased monetary conditions and increased Government expenditure following the cyclone are expected to provide expansionary support.

The Central Bank estimates that the output gap is close to zero in the near term and is projected to turn positive over the medium term. However, the medium-term growth trajectory could be partly constrained by the negative fiscal impulse arising from envisaged primary account surpluses.

Inflation expectations surveyed by the Central Bank show that short-term corporate sector expectations, at 3-month, 6-month and 1-year horizons, trended upwards between June and December 2025, broadly in line with realised inflation. Medium-term expectations at 2-year and 3-year horizons also increased, converging towards the 5% target.

The Central Bank cautioned that both inflation and growth projections are subject to considerable uncertainty, including global geopolitical volatility, external demand conditions and domestic structural reform implementation. It said that sustaining the recovery momentum will depend on the timely and effective implementation of targeted structural reforms and growth-enhancing strategies, as well as policies that promote climate-resilient economic growth.