Update: The Central Bank subsequently raised the policy rate by 100 basis points to 8.75%.
The Central Bank of Sri Lanka (CBSL) is due to announce what the Daily FT described as “probably the most anticipated Monetary Policy Statement in recent times” today (26 May), with markets watching whether the regulator tightens its stance to defend a rupee that recently slid to a three-year low before partially recovering.
The decision lands against a backdrop of resilient bank lending. According to the CBSL’s Credit Supply Survey: Trends in 1Q and Outlook for 2Q 2026, the banking sector’s willingness to lend increased further during the first quarter compared with the fourth quarter of 2025, particularly across the Retail, Corporate and Small and Medium Enterprise (SME) sectors. Appetite for lending to State-Owned Enterprises (SOEs) declined.
Banks attributed the stronger appetite to a positive economic outlook, stable interest rates, favourable business conditions, improved asset quality and stronger corporate earnings, the survey said. Loan demand rose across all four sectors, with housing loans, pawning facilities and vehicle leases climbing in the retail segment. SOE loan demand turned positive, driven partly by financing needs linked to rising fuel prices amid the Middle East conflict.
Asset quality also improved, with non-performing loans declining across all sectors — a trend banks expect to continue. However, lenders cautioned that prolonged geopolitical tensions and supply-side disruptions could weigh on borrower performance and tighten lending conditions during the second quarter.
The Central Bank’s Monetary Policy Board last held the policy rate at 7.75% on 14 May, with the Governor declining to offer forward guidance. The current decision follows market anticipation building through the week and calls from analysts including SJB economist Harsha de Silva for a rate hike of 50 to 100 basis points to anchor inflation and the currency.
