📈 CBSL Chief Signals Economic Resilience; Policy Rate Hiked to 8.75%

The Central Bank of Sri Lanka (CBSL) has raised its policy interest rate by 100 basis points to 8.75% (up from 7.75%) to safeguard macroeconomic stability and curb inflationary pressures driven by Middle East tensions and rising domestic demand. • Economic Growth & Outlook • The economy grew close to 5% during the first half of 2026. • GDP growth for the full year is projected to remain within the 4%-5% target band, though likely settling toward the lower end. • The economy is fundamentally stronger than during the 2022 crisis, backed by improved foreign reserves, fiscal performance, and exchange rate stability. • Inflation & Monetary Dynamics • Near-term inflation is forecast just below 6% due to global oil price volatility, before a temporary rise and a expected return to the 5% target range. • The rate hike aims to prevent second-round inflationary effects and moderate excess demand without contracting the economy. • Inflation rose from ~2% earlier this year to 5.4% last month. • External Sector & Banking • Evolving Middle East conflicts introduced fresh risks to imports, global energy markets, and rupee stability. • Policy tightening has already initiated stabilization in the currency markets. • The banking system continues to maintain excess liquidity, with CBSL utilizing short-term liquidity absorption auctions since late April.