Sri Lanka holds key rate at 8.75pc, flags war-driven inflation

The Central Bank of Sri Lanka kept its key policy rate unchanged at 8.75 percent on Wednesday, saying inflation was likely to remain high over the next six months, which it attributed to the war with Iran. The decision was in line with market expectations and came ahead of a budget due in mid-November.

The hold follows a 100 basis point increase in May, which the central bank said was aimed at steadying the currency and protecting foreign exchange reserves amid the economic fallout from the US-Israeli war with Iran. Inflation stood at 8 percent in September, according to the latest data, a three-year high.

The island nation imports all of its oil, and higher energy costs stemming from the war have pushed it to ration fuel and raise prices by about 35 percent since March.

Sri Lanka's cabinet this week approved a 40.65 billion rupee (USD121 million) diesel fuel subsidy for the next three months, part of efforts to cushion households from rising energy prices.

Investors now look to the mid-November budget for the government's next steps on energy costs and the fiscal position, with the central bank signalling that price pressures are unlikely to ease in the near term.