Monetary Policy Review - No. 5 of 2025

[Confidential] Economic Research Department 24 September 2025

Monetary Policy Review: No. 05 – September 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 support steering inflation towards the target of 5%.

Headline inflation based on the Colombo Consumer Price Index (CCPI) turned positive in August 2025, ending eleven months of deflation. Inflation is projected to gradually increase towards the target of 5% by mid-2026. Reflecting strengthening domestic demand, core inflation is also expected to pickup, and stabilise thereafter around the headline inflation target. Medium term inflation expectations remain anchored around the inflation target.

The economy is estimated to have grown by 4.8% in H1-2025. Leading indicators reflect a continuation of this momentum into Q3-2025. Credit to the private sector recorded a notable and broad-based expansion thus far in 2025. This expansion has been supported by the low-interest-rate environment and the recovery in economic activity. The continued expansion in private sector credit is expected to further support domestic economic activity in the period ahead.

The external sector remained resilient, supported by improved inflows from tourism and workers’

remittances, despite a widening trade deficit. Continued net foreign exchange purchases by the Central Bank have helped maintain gross official reserves at US dollars 6.2 billion by end August, amidst debt service payments. The Sri Lanka rupee remains broadly stable. All three major rating agencies have now raised Sri Lanka’s sovereign ratings, confirming the improved credit standing. Meanwhile, global financial conditions have eased, although geopolitical uncertainties remain.

The Board will continue to monitor and assess incoming data on developments on the domestic and global fronts and emerging risks. The Board remains prepared to implement 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 26 November 2025.

Annexure 01:

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

Based on the Projections during the September 2025 Monetary Policy Round

Realised Inflation — Inflation Target **(5%)

Source: Central Bank Staff Projections ** 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 September 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.

The projections reflect the available data, assumptions, and judgements made at the forecast round in September 2025.

Data Annexure is accessible at https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/mpr05_2025_e.pdf