Central Bank Keeps Policy Rate Unchanged
The Central Bank of Sri Lanka has decided to keep the policy rate, also known as the Overnight Policy Rate, unchanged at 7.75 percent. This decision was made at the sixth policy meeting of the year, which was also the final one for 2025.
Reasoning Behind the Decision
The Monetary Policy Board arrived at this decision considering that the current rates are suitable to steer inflation towards their medium-term target of 5 percent by the second half of next year. The Board also believes that the current rates will help the economy reach its full potential. After nearly a year of deflation, inflation has been picking up in the last three months, with the Colombo Consumer Price Index coming in at 2.1 percent for October from a year ago.
Private Sector Credit Growth
The Central Bank took note of the current spell of higher growth in private sector credit so far this year and expects the conditions to remain in the period ahead. In the first nine months, licensed commercial banks extended as much as Rs.1,365 billion in fresh credit to the private sector, at a robust 22.1 percent growth from a year earlier. However, the Central Bank isn’t worried that it is too much, given the still low private sector credit to the gross domestic product ratio based on historical standards and also the very low state borrowings from the banking sector, given its improved financials.
Economic Growth Projections
The Central Bank reiterated its stance that the economy is doing well and expects the economy to end up growing by close to 5.0 percent in 2025, resembling the growth in 2024. Despite the increase in imports, which widened the trade deficit and also caused the current account of the balance of payment to come under some pressure in the final three months, the record high earnings from exports, remittances, and relatively better earnings from tourism are expected to more than offset the import pressures.
Vehicle Imports
The Central Bank addressed the vehicle imports, which in particular caused the imports to swell in 2025, saying it sees a substantial slowdown in the opening of letters of credit for vehicles in November and also going into December, from the higher levels in July through September, due to the fizzling of the pent-up demand. Hence, what was seen in 2025, in terms of vehicle imports, was unusual, and the Central Bank expects a more normal situation for vehicles in 2026, now that the financing share has also been cut.
Gross Official Reserves
Responding to the jitters over the largely stable gross official reserves, amounting to around US $ 6.2 billion by end-October, compared to US $ 6.1 billion in December last year, Central Bank Governor Dr. Nandalal Weerasinghe said this was due to the relatively higher debt service payments in 2025 compared to 2024, as the government started settling some of the loans while resuming payback under the debt restructuring. However, he confided that the country is going to see the highest level of reserves by the end of the year since the crisis, with around US $ 750 million worth of inflows expected from the multilateral agencies in the next few weeks.
Future Expectations
Dr. Weerasinghe expects the next or the sixth programme tranche of around US $ 347 million to come by December 15, 2025, from the International Monetary Fund and another budget support facility of around US $ 370 million from the Asian Development Bank in the same month. Some other inflows are also expected from the World Bank as well. This is besides the higher inflows from export conversions, which are going to be generally higher in December and also the record high remittances and higher earnings from tourism, as the peak season is underway.
Conclusion
In conclusion, the Central Bank’s decision to keep the policy rate unchanged is a positive sign for the economy, as it will help steer inflation towards the medium-term target and support the economy in reaching its full potential. The private sector credit growth is expected to continue, and the economy is projected to grow by close to 5.0 percent in 2025. The Central Bank is also expecting a substantial slowdown in vehicle imports and a more normal situation in 2026. With the expected inflows from multilateral agencies, the country is likely to see the highest level of reserves by the end of the year since the crisis.
