First Capital Research expects the Central Bank of Sri Lanka to leave its policy rate unchanged at next week’s review, assigning a 60% probability to a hold and a 40% chance of a hike of up to 50 basis points, Hiru News reported.
The research house published the pre-policy note on Thursday. It expects the Overnight Policy Rate (OPR) to stay at 8.75%.
The Central Bank’s published announcement calendar sets the decision — Monetary Policy Review No. 5 of 2026 — for Wednesday, 30 September, following a Monetary Policy Board meeting the previous day.
The case for holding
First Capital’s hold argument rests on two points. The first is that the Central Bank’s 100 basis point increase in May, which took the OPR from 7.75% to its current level, is still working through the economy. Rate changes affect lending and demand with a lag, and the firm argues that tightening has not yet fully landed.
The second is a change to reserve requirements that Hiru reports takes effect next Tuesday — the day before the rate decision. Since April 2026 the Central Bank has run banks’ reserve maintenance on a 14-day cycle that begins on a Wednesday and ends on a Tuesday, so the change falls at a cycle boundary. A tightening delivered through reserve rules reduces the need for a simultaneous move in the policy rate.
What could force a hike
First Capital flags several pressures pointing the other way.
Headline inflation reached 8% year-on-year in August, well above the Central Bank’s 5% target. That figure matches the Colombo index reading of 8.0%; the national index ran slightly higher at 8.1%.
The trade deficit widened to more than US$1 billion in July alone. The firm also cites rising global oil prices and El Niño-driven food price risks — themes consistent with its earlier warning that weather shocks would keep food inflation elevated into 2027.
First Capital has separately forecast growth slowing to 3–4% in 2026 and 2027 on the same May tightening.
Update, 27 September: the growth argument, set out in full
In a further note carried by Hiru News on Saturday, First Capital made its case through the second-quarter growth figure — and conceded the argument running against it.
The firm reads Q2 growth of 4.2% as evidence that tightening is already biting. Only one month of the quarter was affected by the May rate rise, it notes, yet growth still slowed — “suggesting that economic activity is already beginning to respond to tighter financial conditions.”
“While inflation remains elevated, further rate hikes are likely to impose greater costs on growth than benefits for price stability,” the firm said. “Higher borrowing costs would weigh on credit demand, investment, and consumption at a time when the effects of the May hike are still unfolding.”
It adds a second strand of evidence not in the earlier note: August PMI readings point to moderating business activity and demand, which it reads as further sign that tightening is gaining traction without additional help from the policy rate.
Because liquidity is in any case being drained through open market operations and reserve requirements, First Capital argues, “maintaining current rates may offer a more balanced approach to preserving both growth and macroeconomic stability.”
The case against its own call
The note is unusually explicit about the opposing argument. August headline inflation of 8.0% sat above the Central Bank’s upper tolerance threshold for a second consecutive month, keeping pressure on the bank to protect its credibility.
“We count this as a strong argument for a rate hike,” the firm said — before qualifying it on two grounds. Inflationary pressure remains largely supply-driven, and part of the recent acceleration reflects unfavourable base effects as last year’s low readings drop out of the comparison period. Neither responds readily to a higher policy rate.
With oil prices expected to ease and the May increase still working through the economy, it concludes, further tightening would “deliver limited disinflation benefits while posing greater risks to growth.”
First Capital does flag what could change that: geopolitical tension and emerging El Niño risks have widened the range of upside inflation outcomes. Oil prices have risen since July, which could feed into fuel, transport and production costs, and adverse weather could push food inflation higher again. Even so, it argues those pressures are supply-side, and so “may be less responsive to further monetary tightening.”
