The Colombo Consumer Price Index (CCPI) reflected a sharp reduction in food inflation to 4.1% in June from 21.5% in May. Non-food inflation was 16.2%, the Census and Statistics Department said in a statement.

"Inflation is reducing faster than projected. Sri Lanka was expected to hit single digit inflation in September but now we are likely to reach that target in July," said Dimantha Mathew, head of research, First Capital Holdings.

A steep fall in food costs, petroleum prices and electricity tariffs is expected to help lower inflation in the South Asian country of 22 million people.

Sri Lanka's central bank, which reduced interest rates by 250 basis points in early June, is expected to slash rates further in its upcoming policy annoucement next Thursday, analysts said.

"We expect the central bank could reduce rates by as much as another 250 basis points," Mathew added.

After securing a $2.9 billion bailout from the International Monetary Fund in March, Sri Lanka's economic stress is slowly subsiding with its currency appreciating and reserves improving.

But the economy is expected to record a 2% contraction, according to government estimates, after shrinking 7.8% last year.

The figure for national consumer price inflation, released with a lag of 21 days every month, eased to 22.1% year-on-year in April.

The CCPI, a lead indicator for broader national prices, tracks inflation in Colombo, the largest city.

(Reporting by Uditha Jayasinghe; editing by Christina Fincher and Mark Heinrich)

By Uditha Jayasinghe