Inflation set to climb this year, expected to peak in mid-2026: CBSL
- CNL Reporter
- February 15, 2025
- Banking and Financial
- Inflation set to climb this year
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Inflation could possibly hover around 2 percentage points above inflation target
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Headline inflation is forecast to converge to targeted 5% level over medium term, supported by implementation of appropriate policy measures
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Economic growth is expected to continue its rebound over medium term, although at a moderate pace
Sri Lanka’s inflation is expected to increase “sizeably” in the third quarter this year (3Q25), with the possibility of it hovering around 2 percentage points above the inflation target in mid-2026, the Central Bank of Sri Lanka (CBSL) said in its monetary policy report that was released yesterday.
“Nonetheless, headline inflation is forecast to converge to the targeted 5 percent level over the medium term, supported by the implementation of appropriate policy measures,” it said.
The real gross domestic product (GDP) growth for 4Q24 is expected to be robust, sustaining the momentum in the first three quarters of 2024. The CBSL noted that economic growth is expected to continue its rebound over the medium term, although at a moderate pace.
Eased monetary conditions are anticipated to spur growth, whereas the expected continuation of fiscal consolidation efforts will likely have a contractionary effect over the medium term. The growth outlook remains subject to considerable uncertainty, due to the global geopolitical landscape.
As per the latest near-term projections, the Colombo Consumer Price Index (CCPI)-based deflation year-on-year (YoY) is expected to be deeper than anticipated, on average, in 1Q25. This is primarily due to the substantial downward revision of electricity tariffs, effective January 18, 2025, along with the expectations of relatively subdued volatile food inflation.
The CBSL said the statistical base effect would also contribute to lowering YoY inflation during 1Q25, as early 2024 saw price increases driven by the value added tax (VAT) adjustments and notable food inflation amid supply-side disruptions caused by the adverse weather conditions.
“As per the latest projections, headline inflation is expected to increase and average nearly zero 2Q25. During 3Q25, inflation is forecast to increase further, approaching the inflation target of 5 percent,” the CBSL said.
The sharp acceleration in headline inflation anticipated in 2Q25 and 3Q25 is primarily due to the substantial unfavourable base effect, a faster increase in world food inflation and the gradual development of demand pressures. In addition to these factors, the impact of global commodity price movements could further influence the inflationary trends.
However, the surge in inflation is not expected to persist, as the base effect, one of the primary drivers of the estimated surge, is expected to subside in the subsequent quarters. The CBSL noted that the policy measures would support a gradual decline in inflation from 3Q26 onwards, stabilising around the targeted 5 percent level over the medium term.
