Sri Lanka’s headline inflation has accelerated sharply and is projected to remain elevated and above the 5 percent target in the near term before moderating, the Central Bank has said in its Monetary Policy Report for August 2026.
Core inflation is also expected to increase and reach levels around the headline target, the report said.
What drove the acceleration
The Central Bank attributed the rise to a challenging and volatile external environment, pointing to heightened geopolitical tensions in West Asia since late February 2026 and their spillover into the domestic economy.
“Headline inflation, which averaged around 2% in Q1-2026, has accelerated sharply since then, reaching levels above the target, primarily due to the immediate pass-through of higher global energy prices to domestic fuel and energy prices, and their associated spillover effects on other sectors,” the report said.
The acceleration was largely supply-driven, the Central Bank said.
Quarterly headline inflation measured on the Colombo Consumer Price Index averaged 5.9 percent in the second quarter of 2026. That ended an eight-quarter run in which inflation had remained below the target by more than the margin stipulated in the Monetary Policy Framework Agreement.
Risks skewed to the upside
The Central Bank said the balance of risks to the inflation outlook remains skewed to the upside in both the near and medium term, reflecting elevated uncertainty in global commodity markets and the risk of adverse weather associated with El Niño. Inflation expectations, it added, remain broadly anchored around the target over the medium term.
Energy and transport inflation accelerated in the second quarter after upward revisions to fuel, electricity and LP gas prices, and is expected to stay elevated. Food inflation is also projected to remain elevated, with June’s increase in volatile food prices — particularly vegetables and fish — combining with higher transport costs.
The latest projections sit above the path published in the previous report, particularly for the remainder of 2026 and into early 2027.
Policy already tightened
The Central Bank noted it tightened its policy stance in May 2026 “amid the elevated inflation outlook,” ending the accommodative stance in place since mid-2023, to rein in inflation and reduce the risk of expectations de-anchoring.
Governor P. Nandalal Weerasinghe said this week that no further rate increases are expected this year, with inflation tracking broadly in line with the Central Bank’s own forecasts. The projections in Friday’s report assume that the West Asia tensions ease and their economic impact diminishes.
