COLOMBO - Sri Lanka's central bank stunned markets Tuesday, raising its policy rate by a full percentage point - the largest hike since the depths of its 2022 financial crisis. The move aims to curb surging inflation and defend a currency battered by soaring energy prices linked to the U.S.-Israeli war with Iran.
The Central Bank of Sri Lanka lifted the overnight policy rate to 8.75% from 7.75%. The decision far exceeded expectations; only one of 12 economists polled by Reuters had forecast a move of that magnitude.
Governor P. Nandalal Weerasinghe said the hike will help stabilize exchange rates and inflation. Annual inflation has jumped from 2.2% in March to 5.4% last month, driven largely by a 40% spike in fuel prices, rationing, and public holidays as the island nation struggles under the weight of its full reliance on imported fuel.
The rate hike marks a sharp pivot from the central bank's previous focus on supporting economic growth. Capital Economics warned the move underscores Sri Lanka's vulnerability to the Middle East crisis, saying further hikes could follow unless tensions subside.
Sri Lanka's reserves fell 3.8% to $6.7 billion in April as the fuel import bill surged 77% in March alone. The country is relying on a $2.9 billion IMF program to recover from the 2022 crisis. The IMF board meets Wednesday to decide on a $700 million tranche