Sri Lanka raises rate to 8.75% as oil shock hits Asian currencies

Sri Lanka has become the latest emerging market to adopt aggressive monetary tightening, with the Central Bank of Sri Lanka on Tuesday (May 26, 2026) raising its Overnight Policy Rate by 1.0 percentage point after an oil crisis triggered by the Iran war pushed the currency to a record low and began to threaten economic stability.

The monetary move on Tuesday marked the first rate rise in three years, taking the rate to 8.75%, and came as central banks in several emerging markets turned to tighter monetary policy to cope with the impact of the war and defend their currencies.

Last week, Bank Indonesia also surprised markets with a sharp 0.5 percentage-point rate rise, while other central banks are expected to tighten further.

The Reserve Bank of India (RBI) has vowed to curb currency speculation and is reportedly considering a possible rate rise at next week’s meeting, while the Philippine central bank has signalled it may consider a large off-cycle rate increase outside its regular meeting scheduled for Thursday (June 18, 2026).

The moves indicate that the prolonged conflict in the Middle East is forcing policymakers to prioritise “currency stability” over “economic growth” after surging oil prices began to pressure external account balances.

Asia is facing a shock from crude oil prices that have risen more than 40% since the war began in late February, prompting central banks across the region to accelerate efforts to defend their currencies and stem capital outflows.

“Monetary tightening is increasingly being used as a tool to fight inflation and slow currency depreciation,” said Wee Khoon Chong, senior Asia-Pacific market strategist at BNY.

The BNY analyst also said the latest moves indicate that “rate hikes are becoming a regional response trend” rather than an “occasional measure”, adding that markets are watching how the central banks of India and South Korea respond to recent currency weakness.

The Indonesian rupiah, Indian rupee and Philippine peso are among the emerging-market currencies that have weakened the most, falling by 4.5%-6.5% since the war began, while the Sri Lankan rupee has weakened by about 4%.

In addition to rate rises, policymakers across Asia are using emergency measures to stabilise currencies and protect foreign-exchange reserves. Indonesia has announced a plan to centralise strategic commodity exports to support the rupiah, while Sri Lanka has sharply increased car import taxes, introduced fuel rationing and raised electricity tariffs to defend the rupee.

In India, officials have sought to ease economic concerns after Prime Minister Narendra Modi called for austerity policies to conserve foreign exchange, while Bangladesh is negotiating a new loan agreement with the International Monetary Fund (IMF) to address rising challenges.

Rising US Treasury yields are also reducing the appeal of emerging-market assets, with a stronger dollar encouraging capital outflows and increasing the burden of servicing dollar-denominated debt.

Sonal Varma, chief economist for Asia excluding Japan at Nomura Holdings, said many Asian central banks are facing pressure to raise interest rates after the energy shock pushed up both inflation and balance-of-payments strains.

“The policy response will differ from one Asian country to another,” Varma said, depending on the role of fiscal policy in cushioning the shock, each country’s growth and inflation conditions, and the mandates of central banks. She said Nomura expects to see tightening in “the Philippines, Indonesia, Malaysia and Singapore”.