Sri Lanka's key inflation rate fell to 0.9% year-on-year in March from 5.9% in February, the statistics department said on Thursday.

The Colombo Consumer Price Index, a leading indicator for broader national prices, tracks inflation in Colombo, Sri Lanka's biggest city.

The inflation decrease was largely driven by a 22% reduction in power tariffs for households earlier this month. Inflation decreased to negative 4.7% in the Housing, Water, Electricity and Gas category.

Food prices rose 3.8% in March from 3.5% in February, the Department of Census and Statistics said.

Prices for non-food items rose 0.5% this month from 7% year-on-year in February.

"This is a much lower than expected reduction. Our projection was that it would be about 2.6%. However, we see inflation return to a slightly upward trend in April," said Dimantha Mathew head of research, First Capital.

"This will help economic growth pick up as well."

Sri Lanka racked up record high inflation that peaked at 70% in September 2022 after its economy was pummelled by the worst financial crisis in decades, triggered by a plunge in foreign exchange reserves.

Helped by a $2.9 billion program from the International Monetary Fund Sri Lanka's economy has slowly stabilised and is expected to return to growth this year after contracting 2.3% in 2023.

Inflation is likely to remain in line with the 5% target for the next 12-18 months, Sri Lanka's central bank said this week, after reducing policy rates by 50bps.

In total, the Central Bank of Sri Lanka has reduced policy rates by 700bps since last year to help the island nation's economy return to growth.

(Reporting by Uditha Jayasinghe; editing by Christina Fincher)