The Central Bank of Sri Lanka (CBSL) has raised its benchmark Overnight Policy Rate (OPR) by 100 basis points to 8.75%, its first hike of the cycle and a move that exceeds the upper end of analysts’ expectations.
The decision was taken by the Monetary Policy Board at its meeting on Monday (25 May). “The Board arrived at this decision after carefully considering the evolving conditions and outlook on the domestic and global fronts,” the Central Bank said in its statement.
The tightening follows a sharp pickup in inflation. Headline prices rose 5.4% year-on-year in April, up from 2.2% in March, driven largely by the steep increases in domestic fuel and electricity prices that the government imposed as Middle East tensions kept global oil prices elevated.
While the inflation spike is mainly supply-driven, the Central Bank said demand has also strengthened — citing continued growth in bank lending, more imports financed through credit, and leading indicators pointing to firmer economic activity. It expects headline inflation to remain above its 5% target for some time before gradually easing back toward it.
EconomyNext noted there had been warnings for some time that interest rates were out of line with credit demand, contributing to weaker reserve collection and a reliance on foreign exchange swaps. Gross official reserves stood at about USD 6.8 billion at the end of April.
The Board had held the rate at 7.75% on 14 May, with Governor Nandalal Weerasinghe declining to offer forward guidance. SJB economist Harsha de Silva had since called for a hike of 50 to 100 basis points to anchor inflation and a rupee that had slid to a three-year low before recovering. The bank’s first-quarter credit survey had also signalled stronger lending appetite ahead of the decision.
