Financial system remained resilient during the first quarter (Q1) of 2026 amidst challenging global and domestic conditions arising from heightening tension in the Middle East and global uncertainties. Despite global uncertainties and external sector pressures, domestic macrofinancial conditions remained broadly supportive during Q1 of 2026. Credit growth accelerated further during the period, with total credit extended by Licensed Banks (LBs) and Finance Companies (FCs) growing during the period, supported mainly by strong private sector lending. Thus, credit exposures increasingly shifted towards the private sector, while exposures to the Government and public corporations moderated marginally. The sovereign-bank nexus continued to reflect established interlinkages between the sovereign and the banking sector.

The Colombo Consumer Price Index1 (CCPI, 2021=100) based headline inflation (year-on-year, Y-o-Y) remained marginally above the target in May 2026, reflecting the impact of upward adjustments to domestic energy prices amidst the ongoing conflict in the Middle East. Accordingly, headline inflation (Y-o-Y) was recorded at 5.5% in May 2026 compared to 5.4% in April 2026.