Sri Lanka Central Bank Signals Rate Pause, Stays Alert on Inflation

Sri Lanka's central bank has indicated it will likely hold interest rates steady for the rest of the year, saying its surprise hike in May is working as expected and inflation is on a path toward its target.

Governor P. Nandalal Weerasinghe said the bank remains vigilant but sees no immediate need for another increase. "We need to monitor whether there will be any deviation from what we thought," he said, adding that any future tightening or loosening would depend on whether inflation veers off its projected course.

The central bank raised rates by 100 basis points in May, its first increase in over three years, to counter price pressures fueled by rising energy costs linked to the ongoing conflict in the Middle East. Inflation climbed to 7.3% in July, the highest in three years, though the governor expects it to peak near current levels before easing.

Weerasinghe noted that the full impact of May's hike typically takes 12 to 18 months to filter through the economy. He expects inflation to return to the central bank's 5% target in the first half of next year. "Multiple actions are needed to anchor inflation expectations and have a credible policy," he said.

The bank's next rate decision is scheduled for September 30. Analysts had warned that the May hike could jeopardize the fragile recovery backed by the International Monetary Fund. However, the IMF supported the move and approved the release of $695 million from its $2.9 billion program, projecting 3% growth for Sri Lanka this year.

Despite external shocks, Weerasinghe expects the economy to grow between 4% and 5%, arguing that "low inflation is a necessary condition for future growth." The government has raised fuel prices by over 35%, introduced rationing, and declared Wednesdays public holidays to manage the impact of high crude prices.

A key priority remains rebuilding foreign exchange reserves, which the governor aims to boost to about $8 billion by year-end from roughly $6.6 billion currently, as rising fuel import costs threaten the country's external accounts.