Central Bank Governor Dr. Nandalal Weerasinghe has publicly defended the decision to hold Sri Lanka’s inflation target at 5% for another three years, arguing that the lower target urged by many economists would push the country to grow below its potential.
The target itself was agreed and gazetted at the start of October. What is new is the Governor’s detailed case for it, set out on Friday.
”We don’t see any other counterfactual”
Speaking at a panel discussion with junior officers of the Bank, Weerasinghe rejected the argument that a 5% baseline steadily erodes purchasing power.
“So, this is where one can argue, why 2% inflation, is it better? Looking at the purchase power, it looks better, but it’s not better,” he said. “It is worse, because it will create a country that can grow, much lower below its potential…. It’s not welfare optimization. It will make a lot of people worse off than it will make a lot of people better off.”
He said the Bank had done extensive research before settling on the figure, EconomyNext reported.
“I think, we don’t see any other counterfactual to say, it’s not 5%, it’s 4%, or 2%, or 3%, or 6%, or 7%.”
Weerasinghe said countries pick targets according to their growth potential, and that the Bank would revisit the level in future on a “data-driven and evidence-based” assessment — leaving open the possibility of a lower figure later. “We are all convinced and that’s why we have made the recommendation, government also agreed.”
A point, not a range
Hiru News reported the Governor clarifying a distinction that is often blurred: 5% is a point target, not a band within which inflation may comfortably sit.
The ±2 percentage point accountability margin introduced under the Central Bank of Sri Lanka Act is a reporting trigger, not a permitted range. If inflation sits above or below the margin for two consecutive quarters, the Bank must explain itself to Parliament and to the public.
Weerasinghe said margins in IMF programmes can run to ±3 points, but ±2 was judged more appropriate for Sri Lanka. A fixed point target, he argued, makes it easier for businesses and households to anchor medium- and long-term expectations when making spending and investment decisions.
The record so far
The agreement runs through October 2029. EconomyNext noted that the Bank missed the target in most quarters of the three-year period to end-September 2026, attributing falls below the 3% floor to weak energy prices and breaches above the 7% ceiling to high ones.
Critics quoted in that report continue to press for 2%, arguing a persistent inflation gap against trading partners who target 2% builds in pressure on the rupee and raises borrowing costs.
Not reported
Neither report gives the date of the panel discussion or says whether it was a public event. Neither names the economists or officials advocating the 2% target, nor reports any response from the Finance Ministry to the Governor’s remarks. Neither states what the Bank’s own forecast is for when inflation will return inside the 3–7% accountability margin.
