Representative image. Photo: Getty Images/iStockphoto
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.
Seven 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 that has forced a 40% fuel price hike, rationing, and even public holidays on Wednesdays. Inflation has jumped from 2.2% in March to 5.4% last month. 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.
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 (May 27, 2026) 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.
Published – May 26, 2026 11:20 am IST