COLOMBO - Sri Lanka's central bank surprised markets on Tuesday with a 100 basis-point interest rate hike, the first in three years, moving to 8.75% from 7.75%. The move aims to relieve pressure on foreign exchange reserves and keep a $2.9 billion IMF program on track.
Reserves stand at $6.7 billion, enough for about 3.8 months of imports. Soaring energy costs, partly from the Iran war, have lifted import bills and revived currency weakness and deficit risks.
Authorities are balancing tightening against stalling growth. Some analysts call the hike an overreaction. Dimantha Mathew of First Capital cut his 2026 growth forecast to 2.5%-3% from 3%-4%. Other firms lowered projections as well.
The IMF board meets today to decide on two tranches worth $700 million for Sri Lanka.
Inflation jumped from 2.2% in March to 5.4% in April. Higher fuel costs are hitting tourism, a key foreign exchange source. Domestic credit growth driven by strong demand risks widening deficits.
Analysts say the central bank's priority is price stability and external buffers, even at the cost of moderating growth.