Sri Lanka's central bank chief says monetary policy in right balance

Sri Lanka has the right balance of monetary policy at the moment, and domestic inflation is expected to turn positive around next month, Central Bank of Sri Lanka Governor P. Weerasinghe said on Wednesday.

Sri Lanka's inflation, which was minus 0.6 per cent year-on-year in June, is expected to reach the central bank's target of 5 per cent in the next four to six quarters, Weerasinghe said on a panel at the Reuters NEXT Asia summit in Singapore.

"I think we are in a right balance in the monetary policy. We have some space if we are to relax further, but I think right now we have a cautious approach," he added.

Supported by a $2.9 billion programme from the International Monetary Fund, Sri Lanka has steadily recovered from a financial crisis caused by a severe shortfall of foreign exchange reserves three years ago.

The island nation's economy recovered to grow 5 per cent in 2024, and the World Bank predicts it will expand 3.5 per cent this year.

Buoyed by low inflation, the CBSL cut policy rates by 25 basis points in May to promote growth. Growth for this year is expected to be between 4 per cent and 5 per cent, Weerasinghe said.

But Sri Lanka's economic and social stability is vulnerable to global trade risks, the IMF said while approving the fifth review of its bailout last week.

Before they were suspended for three months, US import tariffs of 44 per cent on Sri Lanka threatened to affect about $3 billion of the island nation's exports and possibly undermine its economic recovery.

The CBSL is closely monitoring the impact of US tariffs on Sri Lanka, Weerasinghe said, while noting that monetary policy was mainly focused on the domestic economy.