Sri Lanka Central Bank Cuts Policy Rate to 7.75% to Support Inflation Recovery

The Central Bank of Sri Lanka unexpectedly cut its benchmark overnight policy rate by 25 basis points to 7.75%, marking the first rate reduction in six months and signaling a renewed easing cycle to support the country's economic recovery. This decision reflects the easing of deflationary pressures since March 2025, with inflation projected to turn positive by early Q3 and gradually align with the 5% target. The Monetary Policy Board emphasized that this measured easing aims to steer inflation toward its target amid ongoing global uncertainties and subdued inflationary pressures. Strong private sector credit growth, supported by lower lending rates, is expected to continue, benefiting key economic sectors. External sector performance remains robust, bolstered by tourism revenues, workers' remittances, and net forex purchases, which have helped strengthen official reserves despite a widening trade deficit and some rupee depreciation. Overall, the central bank remains cautious but supportive of sustained domestic economic activity and inflation stabilization.