Sri Lanka’s monetary policy is currently well-calibrated but has room for interest rate cuts if an external shock — such as potential U.S. tariff hikes under former President Donald Trump’s proposals — impacts the economy, Central Bank Governor Dr. Nandalal Weerasinghe said.
Speaking at an “Invest Sri Lanka” forum in Singapore, jointly organised by the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission (SEC), Dr. Weerasinghe said the policy interest rate of 7.75% translates into a real rate of about 2.75%, based on the 5% inflation target.
The Central Bank expects inflation to settle at its 5% target next year, with GDP growth close to 5% — well above the International Monetary Fund’s (IMF) forecast of 3%. “
This reflects the right balance in monetary policy,” he said. “If there’s an external event affecting us, we have the space to support the local economy. But without such a need, pushing rates down could create bubbles or boom-bust cycles.”
He noted that while there were concerns earlier this year when tariff hikes were first announced, the risk has eased. “We saw a risk in April, so we used our policy space very carefully,” he added.
Some analysts have warned that the recent rate cut could spur excessive private credit growth, boost imports from investment borrowing, and undermine foreign reserve accumulation. However, Dr. Weerasinghe expressed confidence in meeting the IMF’s year-end reserve target of around US$7 billion.
On trade, he said Sri Lanka’s competitiveness has not been significantly harmed as the proposed Trump tariffs have been reduced from 44% to 20%.
CSE Director and HNB Investment Bank Group CEO Ray Abeywardena also highlighted the benefits of Sri Lanka’s recent exchange rate stability.
“Over the past year, the rupee has remained stable, supported by prudent policy, improved external performance, and steady inflows from foreign investment and tourism. This stability boosts investor confidence and gives predictability to businesses,” he told the forum.
Abeywardena added that fiscal consolidation, regulatory improvements, and stronger governance are reinforcing macroeconomic stability.
Sri Lanka’s current monetary stability stands in contrast to past policy cycles. Since 2022, the Central Bank has maintained a broadly deflationary stance, often undershooting its inflation target.
In earlier years, rate cuts aimed at hitting the 5% target contributed to a series of currency crises in 2012, 2015-16, and 2019-22. These episodes triggered economic shocks, pushed up deficits, and caused losses at state-owned enterprises due to currency depreciation.
Historically, Sri Lanka’s currency troubles date back decades. The rupee began depreciating in the 1980s, after the 1978
Second Amendment to IMF Articles allowed more flexibility. Economists note that persistent depreciation and inflation have eroded the rupee’s role as a store of value and as a reliable medium of exchange for international trade.
The Central Bank’s early years also saw external instability. In 1952, policy loosening amid a global commodity boom led to external shocks and domestic unrest, while in 1949 a sharp rupee depreciation followed the UK’s post-war sterling crisis.
Analysts say these episodes underline the risks of suppressing interest rates and the long-term importance of maintaining monetary discipline.
