Asia Economic Notes: Sri Lanka: Preemptive rate hikes for price and external sector stability

Research evidence excerpt

Asia Economic Notes: Sri Lanka: Preemptive rate hikes for price and external sector stability

10 June 2026

Asia Economic Notes

demand, pressures on the external sector, as well as the risk of de-anchoring inflation

expectations, the Board was of the view that a tightening of the monetary policy

stance is appropriate at this juncture.” Both core and headline inflation rose from

April, by 0.1 percentage points to 3.9%yoy and 5.5%yoy in May, respectively. The

latter averaged 5.4% in Jan-May, well on its way to reach 5.7% in 2026, as per our

forecast.

We expect another 50bps rate hike in Oct-Dec’26 quarter, leaving the policy rate

at 9.25%, to maintain a positive real rate of 350bps, assuming an average inflation

of 5.7% in 2026, then reverse course and ease by 50bps by mid-2027, leaving the

policy rate down to 8.75%. Although an alternative scenario could see the CBSL

keeping its policy rates steady for a prolonged period, upside risks to inflation from

higher energy prices and the El Nino impact on food prices suggest further rate

hikes are likely in Oct-Dec’26.

CBSL struck an optimistic tone on growth: “While the recent increase in inflation

is largely supply-driven, demand conditions in the economy have also strengthened,

as shown by the continued credit expansion, credit-driven imports, and leading

indicators of economic activity.” Economic data remained mixed in April. Latest data

show Sri Lanka’s remittances rose 18.9%yoy to USD 767.9 mn in April 2026, while

on a cumulative basis, workers’ remittances during the first four months of the year

recorded a 24.5%yoy growth to USD 3.063 bn. However, tourist arrivals declined

for the second consecutive month in April 2026 to 135,643, recording a contraction

of -22.3%yoy, owing to the impact of Middle East conflict.