Sri Lanka's central bank unexpectedly raised interest rates by 100 basis points to 8.75%, a move analysts warn could undermine a fragile IMF-backed recovery.
The rate hike, the first in over three years, aims to contain pressure on foreign exchange reserves as external pressures mount. Reserves have fallen to $6.7 billion, covering about 3.8 months of imports.
Soaring energy costs following the Iran war have increased the import bill, reviving risks of currency weakness and widening deficits.
Policymakers face a delicate balance: tighten too much and risk stalling credit and investment; move too slowly and risk renewed pressure on the rupee, reserves, and inflation.
Citi and CAL have trimmed their growth forecasts, with the IMF set to decide on a $700 million disbursement. The central bank prioritizes price stability and external buffers over growth momentum.
