Sri Lanka Delivers Outsized 100-bp Hike

The Central Bank of Sri Lanka raised its benchmark interest rate by 100 basis points to 8.75% at its May 2026 meeting, marking the first rate hike since March 2023 as policymakers sought to curb inflation and support the rupee amid rising energy costs linked to the Iran conflict. The move surprised markets, with expectations of a hike of only 25 basis points or slightly more. Inflation accelerated to 5.4% in April from 2.2% in March, exceeding the central bank's 5% target, driven largely by sharp increases in domestic energy prices following persistently high global oil costs, while the rupee has depreciated about 8.7% since early March. Authorities have introduced fuel rationing, higher electricity tariffs, and import restrictions to ease pressure on the currency. The central bank said inflation is likely to remain above its 5% target in the near term before stabilizing. The decision comes ahead of an IMF board meeting that could unlock about $700 million in funding for the country.

The Central Bank of Sri Lanka kept its benchmark interest rate unchanged at 7.75% at its March 2026 meeting, maintaining its current stance amid uncertainties stemming from the ongoing Middle East conflict. Headline inflation remained low at 1.6% in February, well below the 5% target, providing room to absorb the impact of higher domestic energy prices following a surge in global energy costs and trade disruptions. Inflation is now expected to reach the target in Q2 2026, earlier than previously projected, and stabilize around that level thereafter. Meanwhile, economic activity remained resilient, with GDP expanding 5.0% in 2025 despite disruptions from Cyclone Ditwah, while early 2026 indicators point to a strong recovery. However, prolonged geopolitical tensions could weigh on growth. The Sri Lankan rupee stayed broadly stable, although some depreciation pressures emerged following the escalation of the Middle East conflict.

The Central Bank of Sri Lanka kept its benchmark interest rate unchanged at 7.75% at its January 2026 policy meeting, holding borrowing costs for the fourth consecutive time, stating that the current stance is sufficient to steer inflation toward the 5% target. Headline inflation stayed low at 2.1% in December, although food prices rose due to cyclone-related supply disruptions and seasonal demand. Inflation is projected to accelerate gradually and move toward the target by the 2nd half of 2026, while core inflation is expected to firm further. Economic momentum remains resilient, with GDP expanding 5.0% in the first nine months of 2025 and private-sector credit continuing to grow, supported by improving activity, vehicle imports, and post-cyclone rebuilding. Despite a wider trade deficit driven by higher imports, strong tourism receipts and workers’ remittances helped sustain a current account surplus and lift official reserves. The next policy review is scheduled for March 25, 2026.