ECONOMYNEXT – Sri Lanka’s consumer prices rose 2.1 percent in the 12 months to October 2025, but prices have risen only 2.4 percent in the 37 months since the central bank’s deflationary policy started to show in the balance of payments.
The widely watched Colombo Consumer Price Index rose 0.1 percent to 193.8 points over the month of October with the food and non-alcoholic beverages falling 0.1 percent and non-foods rising 0.2 percent.
Sri Lanka’s economy grew 4.9 percent in the second quarter, with businesses seeing stable costs and wages increases becoming real backed by broadly deflationary policy of the central bank.
Sri Lanka’s central bank has halted inflationary open market operations, the main tool through which inflation and balance of payments deficits are fired, though concerns remain about buy-sell swaps.
The central bank can also push up food and energy prices and put pressure on families and energy utility finances by depreciating the currency.
Even if money is not printed through inflationary operations the currency can be depreciated by purchasing dollars with newly created money, allowing liquidity to remain unsterilized for weeks on end so that they flow into the hands of borrowers and importers through the credit system and refusing to return the original dollars to banks when they hit the forex market as imports or other outflows.
The rupee can also be depreciated by the central bank purchasing IMF or other loans coming to the government, not sterilizing the new money to retain reserves, and refusing to return the dollars when they flow into the hands of private citizens either through government payments or credit given by state banks who hold the cash.
Over 2025, the rupee has depreciated amid record current account surpluses. A current account surplus however indicates outflows through the capital account – usually to make debt repayments.
The central bank had generally given dollars to the government through unsterilized interventions which reduced excess liquidity. (Colombo/Oct 31/2025)
