The bank hiked its benchmark interest rate for short-term borrowing by 100 basis points to 8.75%, 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% year-on-year in April, exceeding the central bank’s 2026 target of 5%.

“Its currency, the rupee, has depreciated by more than 7% 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 US and Israel attacked Iran.

Sri Lanka is hoping to secure about US$700 million from the IMF later this week, another instalment of the US$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% of the island’s population of 22 million.

The storm caused an estimated US$4.1 billion in direct physical damage to buildings and agriculture, according to the World Bank.