The Iran conflict's impact on global energy prices has forced Sri Lanka to deliver its sharpest interest rate hike in three years, as policymakers battle rising inflation and a weakening currency amid renewed economic stress.
The Central Bank of Sri Lanka unexpectedly raised its overnight policy rate by 100 basis points to 8.75%, a move far steeper than market expectations.
The decision comes as the island nation faces mounting pressure from soaring fuel import costs triggered by the Middle East crisis, which has pushed the Sri Lankan rupee down nearly 9% since March and accelerated inflation.
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Governor P Nandalal Weerasinghe said the aggressive tightening was aimed at stabilising inflation and supporting the currency, while also warning that additional measures could follow if economic risks intensify.
Sri Lanka, heavily dependent on imported fuel, has already imposed fuel rationing and witnessed a sharp rise in energy prices. Inflation climbed to 5.4% in April from 2.2% a month earlier, while foreign reserves declined as fuel import expenses surged.
The move marks a major shift in policy after last year's rate cuts intended to support growth.
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Analysts now expect economic expansion to slow as borrowing costs rise and consumer demand weakens.
The country, still recovering from its 2022 financial crisis, is also awaiting the release of a $700 million IMF tranche expected to support its reserves and broader recovery efforts.
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