Sri Lanka’s central bank has been walking a tightrope between price stability and currency depreciation, and the latest data shows a delicate balance. Consumer prices rose just 2.1 percent year-over-year in October 2025, with the Colombo Consumer Price Index (CCPI) inching up 0.1 percent to 193.8 points. Food prices dipped slightly, while non-food items saw a modest rise. At first glance, this looks like a textbook case of controlled inflation. But scratch the surface, and the picture gets more complicated.
The central bank has indeed halted inflationary open market operations, a key tool that historically fueled both inflation and balance of payments crises. That’s a step in the right direction, but concerns linger about buy-sell swaps and other mechanisms that could still inject liquidity into the system. The real wild card? The rupee.
Sri Lanka’s currency has depreciated even amid record current account surpluses—a counterintuitive trend that raises eyebrows. A current account surplus typically suggests a strong economy, but in Sri Lanka’s case, it’s masking capital outflows, likely tied to debt repayments. The central bank’s role here is critical. By purchasing dollars with newly created money—whether through IMF loans, government borrowing, or unsterilized interventions—it’s allowing liquidity to seep into the economy without proper sterilization. This unsterilized liquidity can flow into the hands of borrowers and importers, fueling demand for foreign currency and weakening the rupee.
The central bank’s actions—or inactions—on sterilization are a key factor. If it refuses to return the original dollars to banks when they hit the forex market, the liquidity remains unsterilized, creating a feedback loop of depreciation and inflationary pressure. This is where policy gets tricky. Even if the central bank avoids printing money through inflationary operations, the currency can still depreciate if the liquidity isn’t properly managed. The result? Higher import costs, pressure on household budgets, and strain on energy utilities.
Sri Lanka’s economy grew 4.9 percent in the second quarter, with businesses reporting stable costs and real wage increases—a positive sign. But growth alone doesn’t tell the full story. The central bank’s broadly deflationary policy has helped, but the specter of currency depreciation looms large. If the rupee continues to weaken, the gains from stable prices and growth could be eroded by rising import costs and inflationary pressures.
The central bank’s challenge is clear: maintain price stability while preventing currency depreciation from undermining progress. It’s a delicate act, but one that will shape Sri Lanka’s economic trajectory in the coming months. The question is, can they keep the balance?