Sri Lanka central bank holds key rate at 8.75%

Business Recorder reported that the Central Bank of Sri Lanka left its benchmark rate at 8.75% on Wednesday, a move largely expected by markets. The decision arrives ahead of the island's budget, due in mid-November. The bank had raised the rate by 100 basis points in May to support the currency and guard foreign exchange reserves during the military conflict with Iran that involved the US and Israel.

Inflation climbed to 8% in August, a three-year high, up from 7.3% in July. Higher energy costs tied to the war have pushed the oil-importing country to ration fuel and lift prices by roughly 35% since March. The central bank projects inflation to stay at high single-digit levels through the first quarter of 2027 before easing toward its 5% target.

The central bank said medium-term inflation expectations stay anchored near its target, while remittances and tourism earnings have held up. The current account is estimated to have posted a surplus in August after four straight months of deficits. Analyst Udeeshan Jonas of CAL Group argued that early tightening has cut demand, and that further hikes look unnecessary if current conditions hold. Sri Lanka is also negotiating the seventh review of its IMF Extended Fund Facility, which could unlock about $330 million in November after the budget.