Sri Lanka’s central bank stunned markets by raising its benchmark policy rate by an outsized 100 basis points on Tuesday, as policymakers scrambled to stem inflation and support a currency buckling under soaring energy prices.The Central Bank of Sri Lanka CBSL) raised the overnight policy rate to 8.75% from 7.75%, blaming higher inflation and a depreciating rupee due to the US-Israeli war with Iran.
Seven out of a dozen economists and analysts polled by Reuters had forecast only a 25 basis-point or slightly higher change to the rate, citing the deepening impact on foreign reserves from the conflict.
Sri Lanka, fully reliant on imported fuel, has been battered by the Iran war-driven energy shock that has forced a 40% fuel price hike, rationing, and even public holidays on Wednesdays.The South Asian country has only just started to recover from a brutal 2022 financial crisis that left businesses and households deeply scarred.Annual inflation has jumped from 2.2% in March to 5.4% last month.Headline inflation is likely to remain above the target of 5% in the period ahead, before easing and stabilising around it, the CBSL said in a statement.”Similar to several regional peer currencies, Sri Lanka rupee experienced notable depreciation pressures in recent weeks, although conditions have since eased to some extent,” the central bank added, referring to a 8.7% depreciation of the currency since early March.The CBSL last changed rates in May 2025 when it reduced them by 25 basis points to boost growth.”This 100bps rate hike suggests the CBSL is shifting gears from supporting growth to defending price stability,” said Udeeshan Jonas, strategy head at Colombo-based equity research firm CAL.”The central bank clearly expects the supply-side pressures from the Iran conflict – specifically oil price volatility and subsequent pressure on the rupee – to have a prolonged, sticky impact on domestic inflation rather than being a transitory blip,” Jonas added.Backed by a $2.9 billion programme from the International Monetary Fund, the island is clawing its way out of a deep financial crisis in 2022 caused by a severe shortfall of dollars.The IMF Executive Board will meet on Wednesday to decide whether Sri Lanka will receive $700 million under its programme, which would help to top up its reserves. These have now decreased by 3.8% to $6.7 billion.
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