Central Bank Governor Dr. Nandalal Weerasinghe has publicly defended the decision to hold Sri Lanka’s inflation target at 5% for another three years, arguing that the lower target urged by many economists would push the country to grow below its potential.

The target itself was agreed and gazetted at the start of October. What is new is the Governor’s detailed case for it, set out on Friday.

”We don’t see any other counterfactual”

Speaking at a panel discussion with junior officers of the Bank, Weerasinghe rejected the argument that a 5% baseline steadily erodes purchasing power.

“So, this is where one can argue, why 2% inflation, is it better? Looking at the purchase power, it looks better, but it’s not better,” he said. “It is worse, because it will create a country that can grow, much lower below its potential…. It’s not welfare optimization. It will make a lot of people worse off than it will make a lot of people better off.”

He said the Bank had done extensive research before settling on the figure, EconomyNext reported.

“I think, we don’t see any other counterfactual to say, it’s not 5%, it’s 4%, or 2%, or 3%, or 6%, or 7%.”

Weerasinghe said countries pick targets according to their growth potential, and that the Bank would revisit the level in future on a “data-driven and evidence-based” assessment — leaving open the possibility of a lower figure later. “We are all convinced and that’s why we have made the recommendation, government also agreed.”

A point, not a range

Hiru News reported the Governor clarifying a distinction that is often blurred: 5% is a point target, not a band within which inflation may comfortably sit.

The ±2 percentage point accountability margin introduced under the Central Bank of Sri Lanka Act is a reporting trigger, not a permitted range. If inflation sits above or below the margin for two consecutive quarters, the Bank must explain itself to Parliament and to the public.

Weerasinghe said margins in IMF programmes can run to ±3 points, but ±2 was judged more appropriate for Sri Lanka. A fixed point target, he argued, makes it easier for businesses and households to anchor medium- and long-term expectations when making spending and investment decisions.

The record so far

The agreement runs through October 2029. EconomyNext noted that the Bank missed the target in most quarters of the three-year period to end-September 2026, attributing falls below the 3% floor to weak energy prices and breaches above the 7% ceiling to high ones.

Critics quoted in that report continue to press for 2%, arguing a persistent inflation gap against trading partners who target 2% builds in pressure on the rupee and raises borrowing costs.

Update, 19 October: the Senior Deputy Governor gives the full reasoning — “we are not inflation nutters”

Senior Deputy Governor Dr. Chandranath Amarasekara has set out the Bank’s reasoning in the most detail yet, the Daily FT reported, speaking at the Ceylon Chamber of Commerce’s Sri Lanka Economic and Investment Summit. His account answers two of the questions this article recorded as unreported, and adds one disclosure the Governor’s remarks did not contain.

The alternatives were actually modelled. Amarasekara said the Bank examined whether a target of 2%, 3% or 4% would suit the current structure of the economy. “The answer was no. We are not there yet,” he said. The Bank also tested whether a more ambitious target would be welfare-maximising — whether it would deliver the best overall outcome for households and the economy — and found that it would not.

That matters for how the Governor’s case should be read. On 9 October Weerasinghe argued a 2% target was “not welfare optimization”; the Senior Deputy Governor now describes that as the result of a test the Bank ran, not a rhetorical position. The two officials are making the same argument, and the second reveals it was a finding.

The phrase, and what it means

“We are not inflation nutters. We do not want to reduce inflation to extremely low levels at any cost. That is not how we operate, and that is why we are called a flexible inflation targeter.”

The Daily FT glosses “inflation nutters” as a central banking term for policymakers who pursue low inflation to the exclusion of growth and jobs.

The historical case

Amarasekara put Sri Lanka’s record on the table as the primary argument:

“Compared to that history, I think 5% is a good inflation rate. It is an ambitious rate, and compared to global best practices, 5% can also be considered low and stable inflation,” he said.

The comparator argument, with the numbers

The critics’ benchmark is the roughly 2% target used by about 15 inflation-targeting central banks. Amarasekara’s answer is a breakdown of that group: 13 of the 15 are advanced economies, and only two are emerging markets. Countries exposed to large energy and food shocks typically set higher targets and wider bands, and Sri Lanka belongs in that group.

He said inflation currently stands at 8%, driven by the energy shock, and that bringing it to a lower target would require a strict monetary policy regime — and therefore high interest rates — maintained for longer than usual. “Is this the time to do it? Not really. The economy is facing multiple shocks, and at the same time, we are still recovering from the crisis.”

Two of this article’s open questions, answered

Who was advocating 2%. The Daily FT names former Finance Minister Ravi Karunanayake alongside independent economists as having urged a cut to 2% or a 2%–3% range, arguing a lower target would better protect household purchasing power and strengthen policy credibility.

The Bank’s own forecast. CBSL projects headline inflation to remain in the high single digits through the first quarter of 2027 before easing towards the target, according to CBSL Economic Research Director Dr. L.R.C. Pathberiya. Read against the ±2 point margin, that is a forecast of inflation sitting above the 7% accountability ceiling for roughly two more quarters — the condition that obliges the Bank to explain itself to Parliament.

The door is left open, without a date

Amarasekara did not rule out a lower target in future. “Gradually, I think it would be good for Sri Lanka to move to a lower inflation target, but not right now,” he said, adding that there was no promise as to when, and that any move would depend on further analysis.

The Daily FT places these remarks at the summit last week, so they post-date the Governor’s 9 October comments above. The agreement itself was signed on 1 October by President and Finance Minister Anura Kumara Dissanayake and Governor Weerasinghe.

Not reported

Neither report gives the date of the panel discussion at which the Governor spoke, or says whether it was a public event. No response from the Finance Ministry to either official’s remarks is reported.

The Daily FT does not give the exact date of the summit session, nor say whether the modelling of the 2%, 3% and 4% alternatives has been or will be published — the Bank’s technical assessment is described but no document is cited. Nothing states what “further analysis” would have to show before the target is cut, or at what point in the three-year agreement such a change could be made.