Monetary Policy Review - No. 4 of 2025

[Confidential] Economic Research Department 23 July 2025

Monetary Policy Review: No. 04 – July 2025

The Central Bank of Sri Lanka keeps the Overnight Policy Rate (OPR) unchanged

The Monetary Policy Board decided to maintain the Overnight Policy Rate (OPR) at the current level of 7.75% at its meeting held yesterday. The Board arrived at this decision after carefully considering both domestic and global developments. The Board is of the view that the current monetary policy stance will help steer inflation towards the target of 5% in the period ahead while supporting growth.

The movements in the Colombo Consumer Price Index (CCPI) reflected a further easing of deflationary conditions as anticipated. Inflation is projected to turn positive this quarter and steadily increase towards the target of 5% thereafter. Core inflation will continue to gradually accelerate in the coming months, reflecting the steady recovery in the economy’s demand conditions.

The economy recorded a firm growth of 4.8% in Q1-2025. Leading economic indicators suggest this growth momentum will continue in the near term. Monetary conditions continued to ease, supporting the rebound in domestic economic activity. Most market interest rates have declined further in response to the recent policy rate reduction. The expansion of credit to the private sector has remained robust and broad-based so far in 2025. This private sector credit expansion is expected to continue.

The external sector continued to be resilient amidst a widening trade deficit. Inflows from tourism earnings and workers’ remittances improved further. Gross official reserves were maintained at healthy levels amidst debt service payments. Reserve buildup efforts continue with regular net foreign exchange purchases by the Central Bank. The fifth tranche of the IMF-EFF was received in early July 2025.

Globally, policy uncertainty has intensified due to the evolving trade landscape and recurring geopolitical conflicts. The Board will carefully monitor any realisation of the global uncertainties and assess incoming data on domestic developments. The Board is prepared to take appropriate policy measures to ensure that inflation stabilises around the target, while supporting the economy to reach its potential.

The release of the next regular statement on the monetary policy review will be on 24 September 2025.

Note: The biannual Monetary Policy Report, the second of such reports for 2025, will be published on 15 August 2025.

Annexure 01:

Headline Inflation Projections* (Quarterly, CCPI, Y-o-Y, %)

Based on the Projections during the July 2025 Monetary Policy Round

Realised Inflation — Inflation Target (5%)**

** The inflation target (5%) was agreed under the Monetary Policy Framework Agreement (MPFA) signed between the Central Bank and the Minister of Finance in October 2023.

* Realised data in the fan chart are based on the CCPI (2021=100, seasonally adjusted). Projections are based on all available data at the forecast round in July 2025.

The confidence bands show the increasing uncertainty in forecasting inflation over a longer horizon.

Note: A forecast is neither a promise nor a commitment.

Data Annexure is accessible at https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/mpr04_2025_e.pdf