By: Staff Writer
January 19, Colombo (LNW): The Central Bank of Sri Lanka (CBSL) is preparing to maintain a cautious yet steady monetary policy stance in 2026, with interest rates expected to remain unchanged in the early part of the year as inflation is gradually guided back to its medium-term target of 5%, according to a research note released by First Capital Research.
Analysing the CBSL’s newly announced Policy Agenda for 2026, First Capital Research said the Central Bank’s approach reflects growing confidence in the macroeconomic stability restored during 2024 and 2025, while remaining alert to emerging risks stemming from supply-side shocks and tightening liquidity conditions.
The CBSL has forecast that inflation will return to target by the second half of 2026, explicitly factoring in the economic impact of Cyclone Ditwah on supply chains. While the accommodative monetary policy maintained over the past year helped revive private sector credit growth and support economic recovery, some volatility was observed in short-term money market rates toward the end of 2025. These fluctuations followed the implementation of the Overnight Policy Rate (OPR) mechanism.
According to First Capital Research, the Central Bank has made it clear that it intends to address such pressures through liquidity management rather than immediate policy rate changes. Measures include fine-tuning market liquidity through targeted operations and a series of Statutory Reserve Ratio (SRR) reforms. These reforms involve redefining the reserve maintenance period, removing the till-cash concession and restoring higher minimum daily reserve requirements, effectively reversing several temporary relaxations introduced during the COVID-19 period.
“These measures indicate a focus on preserving monetary stability while continuing to support growth, with moderate rate changes not entirely ruled out if conditions warrant,” First Capital Research stated.
From a fixed income market perspective, the research firm expects tighter SRR requirements to exert upward pressure on short-term interest rates. However, long-term yields are likely to remain relatively stable, supported by anchored inflation expectations, ongoing fiscal consolidation and a strengthening external position.
Sri Lanka’s Gross Official Reserves rose to $6.8 billion in 2025 the highest level since the economic crisis supported by $2 billion in net foreign exchange purchases. Meanwhile, the external current account recorded a surplus for the third consecutive year, reinforcing confidence in external sector resilience.
Beyond monetary policy, the CBSL’s 2026 agenda prioritises financial system stability. Key initiatives include banking sector recapitalisation and consolidation under the Master Plan Phase II, the introduction of a counter-cyclical capital buffer framework, and the integration of climate-related risks into financial supervision. Reforms to deposit insurance, reserve management and financial inclusion are also outlined.
In equity markets, First Capital Research expects the prevailing interest rate environment and expanding credit conditions to support earnings recovery, particularly in consumer-driven sectors, construction and banking.
Overall, the research firm noted that the CBSL’s 2026 agenda marks a transition from crisis containment to long-term resilience and reforma policy direction likely to be welcomed by markets if consistency is maintained.
