Sri Lanka: Policy tightening supports Rupee – Standard Chartered

Standard Chartered economists Saurav Anand and Siddharth Sadasivam note that the Central Bank of Sri Lanka raised policy rates by 100bps to curb inflation, cool credit-driven imports and support the LKR. They expect further hikes in 2026, with inflation staying above target and risks from high Oil prices, external pressures and weather-related energy costs.

CBSL tightening path and inflation risks

"The Central Bank of Sri Lanka (CBSL) raised policy rates by 100bps on 26 May to curb rising inflation, contain still-strong domestic demand (leading to a rise in credit-driven imports) and support the LKR."

"The CBSL statement clearly acknowledged that headline CPI inflation is likely to remain above its 5% target in the period ahead."

"We continue to see the CBSL raising policy rates by a further 50bps in Q3-2026, with risk of another 50bps hike in Q4 if higher crude oil prices add to inflationary pressures and increase depreciation pressure on the LKR."

"We therefore revise our end-2026 policy rate forecast to 9.25% (from 8.75% previously)."

"We acknowledge the risk of the CBSL keeping policy rates unchanged in 2026 in case of a quick resolution to the Middle East conflict and if crude oil prices stabilise below USD 90/bbl in Q3-2026."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)