
Sri Lanka is expected to emerge from its current deflationary phase in the second quarter of 2025, with inflation projected to reach the target level of 5.0% by the third quarter.
This recovery is supported by the Central Bank’s accommodative monetary policy, adopted in mid-2023, after transitioning from an aggressively tight stance that had severely suppressed demand and supply.
In a report submitted to Parliament on January 10, the Central Bank explained that inflation, which has been in negative territory since September 2023, is anticipated to turn positive in the second quarter of 2025.
The report revealed that Colombo consumer prices dropped by 1.7% year-over-year in December 2024, while national prices fell by 2.0%.
Quarterly headline inflation is expected to return to the target range, within ±2 percentage points of 5.0%, by the third quarter of 2025.
The new Central Bank Act of 2023 mandates the submission of a report to Parliament if inflation deviates from the target range for two consecutive quarters, as it did in the second and third quarters of 2024.
The Colombo Consumer Price Index showed declines of 1.4% and 0.8% during those quarters, reflecting ongoing deflation.
Since June 2023, the Central Bank has reduced policy rates by 775 basis points, reinvigorating credit and consumer markets after two years of contraction caused by record-high rates imposed in April 2022.
The most recent monetary easing in November 2024, which set the Overnight Policy Rate at 8.00%, is expected to stimulate credit flows into productive sectors and support economic recovery.
The Central Bank anticipates that increased demand for credit, goods, and services will drive inflation higher in the coming months, aiding the return to a more stable economic environment.