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.