The Central Bank of Sri Lanka’s forecast that inflation will return to its 5% target rests in part on an assumption that the Middle East conflict de-escalates — a premise already under strain, with Brent crude trading above US$100 a barrel.
L. R. C. Pathberiya, who heads the Central Bank’s Economic Research Department, set out the reasoning at a media briefing on Wednesday, EconomyNext reported.
“We expect with the ease of the Middle East conflict going forward, and also the base effect from the second quarter onwards will … help to decelerate inflation,” he said. “So we expect inflation to stabilize around 5% from Q2 onwards, and it will gradually move towards 5%.”
Where inflation actually sits
Inflation in September held at a 37-month high of 8%, and has now run above the Central Bank’s 7% upper target limit for three consecutive months. The Bank’s published projection has headline inflation staying in high single digits through the first quarter of 2027 before easing — the same trajectory it gave when it held the policy rate at 8.75% on 30 September.
Pathberiya said that although inflation remains high, medium-term inflation expectations are “broadly anchored” around the 5% target. That target was formally retained for three more years under the monetary policy framework agreement signed on 1 October.
The oil assumption
The difficulty is the oil price the forecast is built on. In an August interview with Bloomberg, Governor Nandalal Weerasinghe said that if oil stayed around US$80 a barrel toward the end of this year, Sri Lanka could manage inflation, and he expected it to reach the 5% target “towards end of this year and early next year.”
Brent has since moved above US$100 — a quarter above that benchmark. The pressure has been visible in Sri Lankan supply lines, with two tankers struck by projectiles near the Strait of Hormuz and Iranian cargoes blocked from reaching the island.
Asked about the de-escalation assumption, Weerasinghe said the Bank does not generate its own crude forecast. “Our baseline incorporates external global oil price forecasts published by institutional analysts, including projections from institutions like JP Morgan, alongside baseline projections from international agencies such as the IMF’s World Economic Outlook and global macroeconomic models,” he told reporters.
“We feed these independent forecasts directly into our analytical models,” he said. “Because no entity can forecast global oil price movements with absolute certainty, these assumptions are updated periodically.”
Not reported
The briefing as reported does not state what crude price the current baseline assumes, when the assumption was last updated, or what inflation path the Bank would expect if oil held above US$100. Nor does it quantify how much of the projected deceleration comes from the conflict easing as against the statistical base effect, which operates regardless of the oil price.
