The Central Bank raised interest rates in May because a war pushed up the price of oil. If that war ends, the reason for the increase disappears, but the next scheduled meeting is not until the end of September.

The argument, in short. On 25 May the Monetary Policy Board raised its interest rate by a full percentage point. The reason it gave was an oil shock caused by the war in the Middle East, together with signs that spending in the economy was picking up. On 21 July it left the rate alone. Its next scheduled meeting is 29 September. That is a gap of seventy days. Inside that gap sits a war that has already ended once, in June, and restarted. If it ends again, properly this time, the price of oil falls, the pressure on the rupee eases, and most of the reasoning behind the May increase stops applying. Under the current calendar, nobody at the Central Bank is scheduled to notice until the end of September. This piece does not argue that the Board should cut rates. It argues something narrower and, we think, harder to refuse: the Board should say publicly that it is on standby, that it will convene within a defined number of days of a durable ceasefire, and that it will publish in advance the handful of things it would look at. Standby costs nothing. Not being on standby costs up to seventy days of a policy set for a world that no longer exists.

Sri Lanka’s inflation came back to 5% in the second quarter of this year, for the first time since the framework was signed. The Central Bank has described this as policy working. The more accurate description is that a war in the Middle East arrived and did the job early.

This is not our inference. It is what a Deputy Governor said at the July press conference, on the record. Asked why the Board would not meet again before September, he explained that before the war started, the Bank’s own projections had inflation reaching the 5% target around the end of 2026 or the beginning of 2027, driven by demand pressures building towards that point, and that the war brought the increase forward.

The Bank’s published statements say the same thing more quietly. In March it revised its forecast, noting that inflation was now expected to hit 5% in the second quarter of 2026, earlier than previously anticipated. The reason was oil.

So the honest version of the criticism is not that the target would never have been met. It is that the target arrived two to three quarters ahead of the Bank’s own forecast, and what delivered it was a supply shock the Bank neither predicted nor influenced. A framework that arrives at its destination because the weather changed has not yet demonstrated that it can steer.

There is a sharper point buried in that admission. If the pre-war forecast had inflation returning to 5% by late 2026 with the policy rate sitting at 7.75% and unchanged for over a year, then the Bank was projecting success without raising rates at all. The war pulled the arrival date forward, and the Bank then raised rates by a full point. What the increase responded to was the timing, not the demand story, which was already inside the forecast.

Prices are still below the path the promise implied

Here is a way of looking at inflation that the monthly headlines obscure. Rather than asking how fast prices rose last month, ask where the general price level would now be if the Bank had delivered exactly 5% every year since the Agreement was signed.

The answer is that prices today sit roughly 5.7% below that line, having been about 9% below it at the end of last year. Put simply: a shopping basket that should cost 220 rupees, on the promise the Bank made, costs about 208.

One qualification, stated openly, because the argument is weaker if we hide it. The 2023 Agreement targets a rate of inflation, not a price level. Nothing in it obliges the Bank to make up a shortfall. And the starting point does all the work: measure from before the 2022 crisis instead, and prices sit far above any 5% path, not below it.

But that is the point rather than an answer to it. A target with no stated time horizon lets the price level drift in either direction indefinitely, with no moment at which anyone is obliged to notice. Over the two years in which this drift built up, the policy rate moved by a quarter of a percentage point in total.

The Governor is right about one thing

At the July press conference the Governor was pressed on whether the Board would meet early if the war ended. His answer was that monetary policy decisions are forward-looking, that a sudden shock can move prices sharply for reasons monetary policy cannot address, and that the Board does not need to meet in response to that kind of volatility. Six scheduled reviews a year, in his view, are enough.

He has a strong case, and the three weeks since have made it stronger. Look at what oil actually did.

That is the textbook argument against fine-tuning, and it just ran as a live experiment. Anyone arguing for a rate cut in early July would now look reckless. The domestic fuel pricing mechanism, meanwhile, delivered part of the adjustment on its own: the state fuel corporation cut petrol and diesel prices at the end of June without any monetary decision being required.

So we accept the Governor’s position on volatility entirely. Our argument is a different one.

Standby is not the same as fine-tuning

There is a large difference between reacting to every price movement and being ready to reassess when the specific thing you cited as your reason disappears. The first is what the Governor rejected, correctly. The second is what we are asking for, and he did not address it.

Read the May statement carefully and it rests on four legs:

What the Board cited in May	What happens if the war ends
Oil prices forcing sharp increases in domestic energy prices	Reverses within weeks
Short-term inflation expectations having risen	Reverses
External pressure amplified by speculative activity	Reverses
Domestic demand strengthening, credit growth, credit-driven imports	Persists

Three of the four legs are war-dependent. Only one is not. A decision resting on four legs, three of which can vanish inside a month, is a decision that deserves a scheduled opportunity for review.

And note the Governor’s own test. He said the Board would meet outside the calendar if excess demand were emerging, if there were pressure on the currency, or if demand were driving inflation. Two of those three triggers are precisely what a war’s end would flip. By the criteria he himself set out, the end of the war is a candidate for reassessment, not automatically a reason to cut, but a reason to look.

Standby means the Board commits to looking, not to acting. That distinction is the whole argument, and it is why the volatility objection does not apply. Nobody is asking the Board to respond to a three-day move in Brent. They are asking it to say what it would do if the single event it named as its reason came to an end.

What the market thinks the next ten weeks hold

We can put numbers on this rather than speculate. Kalshi is a regulated US exchange where people trade contracts that pay out if a specific event happens. Because these contracts trade at prices between zero and one hundred, the price is readable as a probability: a contract trading at 26 implies the market thinks there is roughly a 26% chance of the event.

Two of these markets are directly relevant. One asks where US crude oil will be on 3 November. The other asks whether crude will fall to $65 a barrel, a level that would clearly signal the war premium had gone, and by when.

The second market makes the timing question concrete, and it also shows just how violently views have swung.

Take those two charts together and the case for standby writes itself. The market says a war-ending oil collapse is unlikely in the next month but far from remote over the next six weeks, roughly a one-in-four chance of arriving right before the September meeting, and a meaningful chance of arriving after it. That is precisely the situation in which a central bank should say in advance what it would do, rather than leaving everyone to guess.

It is also worth noticing what is not needed to make this argument. You do not need a view on how the war will end, on who will win it, or on the political calendar in any other country. You need only observe the oil price and the exchange rate, both of which the Bank watches already.

What standby would actually look like A stated trigger and a stated deadline. “The Board will convene within ten working days of a durable ceasefire being confirmed.” One sentence. A published list of what it would examine. The landed cost of imported fuel, the exchange rate, credit growth, and short-term inflation expectations. Four indicators, named in advance, so that markets and the public can form the same view the Board will form. A conditional statement of intent. Not a promise to cut. A sentence saying what the Board judges would follow if the energy shock reverses while credit growth stays firm, and what would follow if both reverse together. A published rule for looking through supply shocks. The absence of one is why the same war could justify holding in March and raising in May without any inconsistency ever being formally admitted.

Why the rulebook makes standby harder than it should be

The Monetary Policy Framework Agreement, the document that creates the 5% target, runs to two operative paragraphs. Its brevity is not elegance. It is the reason the Board can move in opposite directions on the same evidence without ever being caught out.

It never says over what period success is judged

The Agreement instructs the Bank to maintain inflation at 5%. It does not say whether that means each quarter, each year, or on average over three years. Every policy statement refers to stabilising inflation “over the medium term”, but that phrase appears nowhere in the signed document. The Bank chose it. In other words, the period over which the Board is held accountable is set by the Board.

It never expires and is never reviewed

The Agreement says only that it takes effect from the date of signing. There is no review date and no expiry. India, by contrast, is legally required to revisit its inflation target every five years, and did so in March 2026. Sri Lanka has run the same number since 2023 with no scheduled occasion on which anyone must ask whether 5% is still right for an economy that has changed enormously.

It has no rule for supply shocks at all

Core inflation appears in every policy statement and in none of the Agreement. There is no definition of it, and no published rule for when a price rise counts as temporary. This is exactly how the same oil shock became a reason to hold rates in March, the Board said the low starting point gave it room to absorb higher energy prices, and a reason to raise them in May.

The number the Bank is judged on is not entirely its own

This is the least discussed problem and, in our view, the most serious.

The price index the Bank is legally assessed against is compiled by the Department of Census and Statistics, which is a department of government rather than an independent statistical agency. A meaningful share of the goods in that index are priced by the government itself: electricity tariffs set through the utilities regulator, and fuel prices governed by a formula that has been suspended and reinstated more than once.

The consequence is uncomfortable and straightforward. Government decisions can move the number the Central Bank is graded on. The deflation of 2024 and 2025, when prices actually fell, was substantially produced this way, through electricity tariff cuts and falling administered fuel prices. The Bank duly wrote to Parliament in January 2025 explaining a miss that Treasury and regulatory decisions had done much to cause.

A system in which the assessed party explains results largely determined by the assessing party, measured by a statistic the assessing party produces, is not a working accountability system.

The choice of index compounds this. The Agreement hard-codes the Colombo index, which covers urban areas of one district. Changing it would require a new Gazette. Its basket of goods is weighted using spending patterns from 2021, a year of import controls, shortages and queues. The Bank is steering by a map of what households bought during the run-up to a collapse.

	Colombo index (the target)	National index
Where prices are collected	Urban Colombo district	All nine provinces
Share of basket that is food	28.2%	39.2%
Published	Last working day of the month	About 21 days later
Core inflation, June 2026	4.0%	5.0%

In fairness, the national index would not obviously be a better target: because food makes up a far larger share of it, using it would formally hold the Bank responsible for even more of what it cannot control. And the Colombo index is genuinely fast, published on the last working day of the month, quicker than the United States, Europe or India. Timeliness is not the problem. The frozen 2021 basket, and the fact that changing anything requires a new Gazette, are.

Forecasts that nobody independently checks

Everything happens inside one building. The Bank’s research department produces the inflation forecasts. A committee chaired by the Governor turns them into recommendations. The Monetary Policy Board, on which two outside experts sit alongside the Governor, board members and two deputy governors, takes the decision.

Forecasting in-house is not itself a fault; every serious central bank does it. What is missing is any published outside benchmark to check those forecasts against. Brazil’s central bank collects and publishes a weekly survey of well over a hundred private institutions, so its own numbers are continuously and visibly scored against an independent consensus. India publishes a professional forecasters’ survey. Sri Lanka publishes nothing equivalent.

The gap widens when you look at expectations. Sri Lanka has no inflation-linked government bonds, bonds whose payout rises with inflation, whose price tells you directly what investors expect inflation to be. The ordinary government bond market is too thin after the debt restructuring to infer much. So the only systematic evidence on what people expect inflation to be is the Central Bank’s own survey.

Which means that every policy statement’s assurance that inflation expectations remain well anchored around the target, a claim central to every decision the Board takes, is produced by the institution the claim exonerates, and can be independently verified by nobody.

Sources. Monetary Policy Framework Agreement, Gazette Extraordinary No. 2352/20, 5 October 2023. Central Bank of Sri Lanka Monetary Policy Reviews Nos. 2, 3 and 4 of 2026, and the Policy Announcement Tracker confirming meeting dates of 29 September and 19 November 2026. Transcript of the July 2026 monetary policy press conference. CBSL Report on the Deviation of Headline Inflation from the Inflation Target, presented to Parliament 10 January 2025. Department of Census and Statistics monthly price releases. Ceylon Petroleum Corporation price revisions of 30 May and 29 June 2026. Kalshi prediction-market price histories for US crude oil, markets KXWTI-26NOV03 and KXWTIWHEN-65, data to 26 July 2026. Reserve Bank of India, five-yearly target notification of 25 March 2026. Banco Central do Brasil continuous inflation target framework, in force from January 2025.