COLOMBO: Sri Lanka's central bank raised interest rates for the first time in more than three years on Tuesday as it battles high inflation and a tanking currency fuelled by the Middle East war.
The bank hiked its benchmark interest rate for short-term borrowing by 100 basis points to 8.75 percent, saying the conflict was having a negative impact on domestic prices and stability.
The Middle East war, which began in late February, has effectively closed the Hormuz strait, a vital oil and gas trading corridor, driving up energy prices and stoking global inflation.
"The uncertainties arising from the heightened tensions in the Middle East have prompted global commodity prices, particularly petroleum, to remain high, adversely affecting the global as well as the domestic economy," the Central Bank of Sri Lanka said.
Inflation in Sri Lanka more than doubled to 5.4 percent year-on-year in April, exceeding the central bank's 2026 target of five percent.
Its currency, the rupee, has depreciated by more than seven percent against the US dollar since the beginning of 2026, the central bank said.
The government has raised energy prices by more than a third, rationed fuel and sharply increased electricity tariffs since the United States and Israel attacked Iran.
Sri Lanka is hoping to secure about $700 million from the IMF later this week, another instalment of the $2.9 billion bailout agreed in early 2023 after the country's worst economic crisis.
The country was hit hard by a cyclone late last year that killed at least 643 people and affected more than 10 percent of the island's population of 22 million.
The storm caused an estimated $4.1 billion in direct physical damage to buildings and agriculture, according to the World Bank.
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