The Central Bank of Sri Lanka has released its Bi-Annual Monetary Policy Report – February 2026, outlining updated baseline projections for inflation and economic growth following the January 2026 monetary policy review.
According to the report, headline inflation is expected to accelerate during the second half of the year, supported by gradually strengthening domestic demand, and move toward the Bank’s 5% target. With appropriate policy measures in place, inflation is projected to stabilise around this target over the medium term.
The Central Bank noted that inflation has been on a gradual upward trend since returning to positive territory in August 2025 after a prolonged period of deflation. Energy and transport inflation, which remained deeply negative for nearly two years, has eased and is expected to turn positive in the near term, although this outlook remains sensitive to global fuel prices and geopolitical developments.
Core inflation is projected to rise gradually and stabilise, while headline inflation is expected to increase in line with strengthening domestic demand and import cost pressures linked to global food prices and broader inflationary trends.
The Bank cautioned that disruptions to agricultural production caused by Cyclone Ditva could generate upward pressure on prices. Volatile food inflation is expected to remain elevated in the short term, although reconstruction and replanting efforts are anticipated to help mitigate the impact. The trajectory of food prices, however, remains uncertain amid recurring extreme weather events.
On growth, the report said real GDP expansion moderated in the fourth quarter of 2025 compared to the first three quarters, largely due to cyclone-related disruptions. As a result, real GDP growth for 2025 is estimated at around 4.5%.
Economic growth in 2026 is currently forecast to range between 4% and 5%, extending the recovery momentum observed over the past two years. In the near term, easing monetary conditions and increased government spending following the cyclone are expected to provide expansionary support.
The Central Bank stressed that both inflation and growth projections remain subject to considerable uncertainty, citing global geopolitical instability, external demand conditions, and the pace of domestic structural reforms as key risk factors.
