The Central Bank of Sri Lanka (CBSL) expects headline inflation to remain above its 5% target in the near term, with risks tilted to the upside as energy and transport costs, exchange-rate pass-through and food prices add to price pressures.
In its Monetary Policy Report for August 2026, the CBSL said headline inflation based on the Colombo Consumer Price Index (CCPI) averaged 5.9% in the second quarter, ending an eight-quarter period during which inflation remained below the target by more than the margin specified under the Monetary Policy Framework Agreement.
The Central Bank expects inflation to remain above target in the near term, driven mainly by energy and transport inflation, exchange-rate pass-through to imported prices and higher volatile food inflation and its base effect. It expects inflation thereafter to moderate towards 5%, conditional on the effects of Middle East tensions and their spillovers proving temporary and gradually dissipating.
Energy and transport inflation accelerated in the second quarter following increases in fuel, electricity and LP gas prices, before easing marginally after downward revisions to fuel and LP gas prices in July. Weather-related uncertainty could also raise electricity generation costs.
The CBSL warned that an escalation of geopolitical tensions could disrupt commodity markets, energy supplies and shipping routes, raising domestic energy, transport and fertiliser costs.
Further rupee depreciation arising from adverse market sentiment and external shocks could also increase imported goods and production input prices, while adverse weather, including El Niño conditions, could pressure food and energy inflation.
‘Risks to inflation projections are assessed to be skewed to the upside in both the near and medium term,’ the CBSL said.
Corporate-sector inflation expectations also increased across all horizons during the first half, with three-month and one-year expectations rising notably between January and June. However, the increase in medium-term expectations was marginal, with expectations remaining broadly anchored around the 5% target.