Presentation of Monetary Policy Review No 4 of 2026

[00:00:00]Good morning everyone. Uh yesterday uh the monetary policy board of the central bank of Sri Lanka met uh for the fourth time in 2026 to decide on the monetary policy stance. Accordingly uh the monetary policy board decided to keep overnight policy rate OPR unchanged at 8.75.

[00:00:22]uh the margins for determination of standing deposit facility rate SDFR and the standing lending facility rate SLFR to OPR remain unchanged at plus or minus 50 basis points. Also, stat to reserve ratio SRR remains unchanged at 2%.

[00:00:44]So the board arrived at this decision after carefully considering the evolving conditions and outlook on the domestic and global fronts. So in this presentation I will briefly take you through the main factors considered by the board uh at arriving arriving at this decision.

[00:01:02]Uh firstly uh uh renewed tensions in the Middle East have resulted in a surge in global commodity prices particularly petroleum. If you see this uh chart, this shows uh crude oil prices both Brent and WTI prices. So we have seen uh large increases in uh March, April and May and then some uh deceleration or uh reduction in the prices. But again if you see the uh towards right hand side that shows uh uh July uh update and we see again uh Brent crude oil price at $92 uh per barrel where we in the uh early July we observed very low values also around 67.

[00:01:49]So with this uh uh renewed tensions in Middle East, so we have seen increase in uh crude oil prices. So these developments are likely to uh dampen uh global economic prospects uh with potential speed lowers to the domestic economy uh mainly through uh transport and energy price increases.

[00:02:14]Headline inflation accelerated to 6.8% 8% year on year in June 2026. This is mainly due to higher domestic energy and food prices. So if you this see this chart to your left that shows uh headline inflation and co-inflation developments in in recent uh months as well as last couple of years. So if you see this blue line um that shows uh headline inflation. So uh in the month of June year on year headline inflation was at 6.8%. 8% but if you see in the month of March headline inflation was at 2.2%. So since March we have seen within 3 months uh headline inflation increasing from 2.2% to 6.8%.

[00:02:59]So reasons or contribution to this increase is shown in uh the chart to your right and uh if you see the last three uh bars so those are uh April, May and June that shows the the main contribution. Now if you see this orange uh bar so that shows uh the contribution to this increase in inflation by energy and fuel. So this energy bar is it's a significant contribution which was not expected at the month of February. So this is uh the due to the disruptions in supply side and uh due to uh increase in oil prices.

[00:03:37]So headline inflation uh we forecast focus at the m at the moment during this cycle to remain above the target of 5% in the near term and before gradually returning to the targeted levels and you can see this fan chart. So from this fan chart also you can see this increase in near-term headline inflation and it's gradually returning back to 5% level.

[00:04:02]That's the inflation target and co-inflation also at 4% at the moment and we expect co-inflation also to increase uh going forward and remain around the headline inflation target. So although we see this uh near-term uptick in actual inflation inflation expectations remain well anchored around inflation target due u over the medium term.

[00:04:29]So we have uh numbers for uh Q1 2026 uh growth numbers. The economy recorded a real growth of 5.1% in Q1 2026. So this is the 11th quarter we see continuous expansion in the economy and this uh more or less uh this expansion is coming from all the sectors in the economy and also uh we have shown here the purchasing managers index. So which is a leading indicator in our analysis and uh we have uh purchasing managers in index for manufacturing and services for the month of June and purchase managers purchasing managers index for construction for May and all three indicators we see some uh increase u month-on-month increase this is above 50 index point so we see the momentum continuing in the month of June as well in the economic activity So in line with uh the monetary policy tightening in May 2026, the tightening was uh done in the last week of May and we see already market interest rates uh adjusting uh accordingly. So if you see this uh chart, you can see the uptick in uh interest rates and this uh table shows in each indicator that we uh compile uh show uh this increase. Some of these indicators are uh as at uh for the month of June and others uh the latest indicators in July. So June indicators are quite provisional and we have not published them yet. So AWCMR uh increased by 103 uh basis points since the change in uh uh monetary policy rate OPR and uh treasury bills uh increased uh quite notably 91 day treasury bill increased by 195 basis points uh since uh late May and one year treasury bill rate increased by 171 basis points. So other indicators also uh we see AWPR increased by 80 basis points and new lending rates increase by around 40 basis points in the month of June and new deposit rates increased by notably 124 basis points and credit to the private sector has expanded again notably by uh 824 billion uh during January to May 2026. there's around 8 uh 27.8% 8% year-on-year increase as you can see from this uh this chart and we have numbers provisional numbers for the month of June also and we again we see this expansion u similar to uh month of May but one thing we have to note here is this expansion is including the depreciation uh that we observed during these months so if you remove depreciation or parity impact from the expansion it's uh lower however with this uh together with the policy measures taken by the government and the central bank and the monetary policy tightening uh that was done in May 2026 and its gradual transmission to the real economy. We expect uh private sector credit to uh moderate and also build up of uh demand pressures to moderate going forward.

[00:07:49]If you see the external sector, the pressure on the external sector caused by Middle East conflict has eased uh to to a certain extent although the outlook remains uncertain uh due to renections.

[00:08:01]So this uh chart to your left shows the monthly merchandise trade performance and the red line is imports and the other line is exports and you can see uh increase in imports. The red line mainly due to uh increase in uh full import bill and uh we see in the month of May some uh reduction in uh imports mainly due to reduction in full import bill and uh if you see the right hand ch side chart that shows a composition of monthly current account and uh the red line shows the current account deficit or surplus. So continuously we see April and May uh current account deficits uh mainly due to uh it's driven by the trade balance. As you can see from this chart uh the trade balance impact of trade balance is shown in uh the orange orange bar.

[00:08:56]Uh so going forward so we expect uh this uh demand for motor vehicles to come down. So one other reason is for this increase in imports is demand for motor vehicles. But with with the measures taken one is increase in LTV tightening LTV ratios and also government's u increase in search charge for motor vehicles. Uh so and also the monetary policy tightening we expect motor vehicle imports also to decelerate and u support this current account current account uh workers remittances have remained strong so far this year and the tourism earnings are slowed down. So if you see tourism earnings first uh which is uh shown in the uh chart to your uh left and uh so this red line shows uh the tourism arrivals and we see the deceleration in tourist tourist arrivals and tourist tourism earnings we also there's a reduction and around 12% reduction year on year for the from January to June uh 2026. So in 2025 tourist earnings recorded at $1.7 billion. Uh in 2026 it's uh $1.5 billion. So this reduction is mainly due to the reduction in tourism mainly due to uh the the conflict situation and workers remittances. Uh as I mentioned we have seen again this uh other chart shows workers remittances in red line.

[00:10:28]So we have seen u uh quite uh significant increase in workers remittances this year. Uh uh but in the month of June we see some deceleration to $695 uh u million compared to $847 million in May. uh but uh again we have provisional numbers for first half of July workers remittances and we see the the trend returning to the trend and high workers remittance numbers as we see before June and if you see uh January to June numbers uh workers remittances increased earnings from workers so workers remittances increased by 23.2% yearonear to uh 4.6 6 billion US in the first half of 2026 compared to $3.7 billion US recorded in 2025 and gross official reserves stood at 6.45 45 billion US as at end June 2026 and this is amid a foreign debt service payments and uh uh forex purchases from the central bank is shown in in the uh chart to your right and first half of uh this year uh for central bank purchased in net terms around 600 million US from the market and in July also we have purchased thus far a substantial amount of u forex from the domestic foreign market uh in net terms and the Sri Lanka rupee has stabilized somewhat in recent weeks as you can see from this uh chart and uh this reflects uh the impact of policy measures taken uh thus far and if you see monthly uh depreciation numbers April we see around 1.3% depreciation May 2.6% depreciation June again 2.6 6% depreciation but in July thus far it's a marginal appreciation overall currency has been depreciated by 7.8% uh thus far in 2026 but if you see this other table that shows uh the peer country uh movements in their currencies and we see this kind of trend in other countries as well uh following the Middle East uh tension.

[00:12:53]So with that uh the central bank expects uh the monetary policy tightening carried out previously to transmit to the economy in the period ahead and the central bank will continue to closely monitor domestic and global developments for emerging risks and central bank will stand ready to appropriate uh take appropriate measures to ensure that inflation stabilizes around the 5% target while supporting the economy to reach its potential over the medium term.

[00:13:21]Thank uh one more thing. So uh this time so we usually publish monetary policy reports uh two reports per year. So first report we publish in February and next report is due in mid August. So uh we will publish that uh media uh monetary policy report based on uh the monetary policy review this uh July monetary policy review. So this monetary policy report uh will contain contain economic developments as well as uh rationale for this uh decisions taken by the monetary policy board in uh recent monetary policy uh reviews. Thank you.