Inflation Set to Rise, But Growth Momentum Holds Strong

COLOMBO (News 1st): The Central Bank of Sri Lanka (CBSL), in its Monetary Policy Report for August 2025, has outlined key economic developments and projections, indicating a shift from deflationary conditions to a more stable inflation trajectory, alongside continued economic recovery.

According to the report, inflation has remained in negative territory since September 2024, primarily due to declining energy and transport costs, as well as easing food prices. However, deflationary pressures have moderated since March 2025, driven by rising food inflation and upward adjustments in energy prices.

The Central Bank notes that this brief episode of deflation has not disrupted economic activity or producer behavior, and has instead helped ease the cost-of-living burden for households.

Deflation is expected to end by Q3 2025, with inflation gradually accelerating to reach 5% by mid-2026.

In the medium term, inflation is projected to stabilize around the target rate of 5%, although temporary fluctuations may occur. Core inflation, currently at a low positive level, is also expected to rise gradually before stabilizing.

The CBSL maintains a relaxed monetary policy stance, citing subdued demand-driven inflationary pressures. Market interest rates have declined notably, supporting strong credit growth across all major sectors.

On the external front, Sri Lanka’s economy has shown resilience in 2025, despite global uncertainties. 

The Sri Lankan rupee experienced a modest depreciation against the U.S. dollar, supported by improved tourism earnings, worker remittances, and the fifth tranche of the IMF’s Extended Fund Facility (EFF). 

Gross official reserves have remained above USD 6 billion, while meeting debt servicing obligations.

Looking ahead, the Central Bank anticipates continued near-term growth, supported by credit expansion, recovering demand, and a stable policy environment. 

However, it cautions that global trade shifts, policy uncertainties, and geopolitical tensions may pose risks to the outlook.

To sustain growth and ensure equitable benefits, the CBSL emphasizes the need for actionable, growth-enhancing policies and structural reforms.