The decision to hold policy comes despite mounting price pressures, as policymakers seek to support economic growth, which has struggled following a series of rate hikes that commenced in 2015.

"The decision.. is consistent with the objective of maintaining inflation at mid-single digit levels over the medium-term and thereby facilitating a sustainable growth trajectory," the central bank said in its policy statement.

It said although the economy remains vulnerable to weather-related disturbances and rising global commodity prices, reforms and foreign inflows over the medium term are expected to improve economic resilience.

The policy decision also comes ahead of the 2018 budget, which the finance minister is scheduled to deliver to parliament on Thursday and is expected to introduce more reforms to boost jobs.

The central bank has had to balance the need to temper price pressures with the need to support an economy hit by extreme weather, with the most severe drought in 40 years in the first quarter and the worst flooding in 14 years in May.

Private sector credit grew 17.5 percent on-year in September, slowing from 18 percent a month ago, but much lower than a near four-year high of 28.5 percent hit in July 2016.

Consumer inflation accelerated a record 7.8 percent last month from a year earlier, up from the previous month's 7.1 percent increase.

The International Monetary Fund said in September that the central bank should "stand ready to head off pressures on inflation and credit growth".

Central bank governor Indrajit Coomaraswamy had expected the economy to grow by around 4.5 percent this year, marginally better than the pace clocked in 2016.

But previous rate increases and tight fiscal policies have dragged on growth with gross domestic product (GDP) expanding just 3.9 percent in the first half of 2017 from a year earlier.

Analysts say the central bank is now focusing more on stoking GDP growth than taming credit with the economy expected to see weaker momentum due to floods and drought that hit the island nation.

"The decision makes sense as inflation is up due to supply-side shocks and increased taxes. If the rates are reduced, there could be unnecessary credit demand," said Sanjeewa Fernando, strategist at CT CLSA Securities.

"We see a decline in borrowing from high-end private sector, which has resulted in lower credit growth. But construction sector and government borrowing are still high."

Analysts expect 2017 growth will significantly undershoot the central bank's forecast of between 4.5 percent and 5 percent, although Prime Minister Ranil Wickremesinghe has predicted up to 5 percent growth for the year.

(Reporting by Shihar Aneez; Editing by Sam Holmes)