Sri Lanka jolts markets with outsized 100-bp rate hike to counter crisis in West Asia
Sri Lanka's central bank unexpectedly raised its benchmark policy rate by 100 basis points to combat inflation and currency pressure. The increase comes amid rising energy prices linked to the U.S.-Israeli conflict with Iran, which has severely impacted the country's economy. Inflation has surged, and the central bank anticipates it will remain above target in the near future.
- ▪The Central Bank of Sri Lanka raised the overnight policy rate from 7.75% to 8.75%.
- ▪Inflation in Sri Lanka jumped from 2.2% in March to 5.4% last month.
- ▪The Sri Lankan rupee has depreciated by 8.7% since early March due to external pressures.
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Sri Lanka’s central bank caught markets off-guard by raising its benchmark policy rate by an outsized 100 basis points on Tuesday (May 26, 2026), as policymakers looked to stem inflation and sharp pressure on the currency from 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 U.S.-Israeli war with Iran. Stock markets turn flat after falling in early tradeSeven out of a dozen economists and analysts polled by 25-basis-point had forecast only a 25-basis-point or slightly greater 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…
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