Sri Lanka’s inflation is climbing back toward 5 percent, food prices are under pressure, and growth momentum faces fresh uncertainty after Cyclone Ditwah, warns the Central Bank.
The Central Bank of Sri Lanka has released its Bi-Annual Monetary Policy Report for February 2026, outlining revised inflation and economic growth projections following the January policy review. The report signals a turning point in Sri Lanka’s post-deflation recovery, with headline inflation expected to accelerate in the second half of 2026 and gradually move toward the 5 percent target.
After emerging from a prolonged deflationary period in August 2025, inflation has been steadily rising. The Central Bank attributes this to strengthening domestic demand, easing monetary conditions, and mounting import cost pressures linked to global food prices and broader global inflation trends. Energy and transport inflation, which remained in deep deflation for nearly two years, has now eased and is likely to turn positive in the near term. However, the outlook remains sensitive to global fuel prices and geopolitical developments.
Core inflation is projected to gradually increase and stabilize around the target. Headline inflation is also forecast to rise steadily, reflecting domestic demand recovery and external price shocks. The Central Bank cautions that food inflation will remain volatile, especially following disruptions to agricultural production caused by Cyclone Ditwah. Reconstruction and replanting efforts are expected to limit long-term damage, but recurring extreme weather events create significant uncertainty in food price trajectories.
On the growth front, real GDP growth moderated in the fourth quarter of 2025 compared to earlier quarters, largely due to cyclone-related disruptions. As a result, overall economic growth for 2025 is estimated at around 4.5 percent. For 2026, growth is projected to range between 4 percent and 5 percent, supported by expansionary fiscal measures and continued recovery momentum.
The Central Bank emphasizes that both inflation forecasts and GDP projections remain vulnerable to global geopolitical instability, external demand conditions, and the timely implementation of domestic structural reforms.
