27/05/2026

BIZ & FINANCE WEDNESDAY | MAY 27, 2026

17

Sri Lanka central bank stuns with 100-bps rate hike

Bank of Japan’s new trend gauge shows inflation exceeding target TOKYO: Japan’s core inflation as measured by a new central bank gauge accelerated in April and blew past its 2% target, data showed yesterday, helping make the case for an interest rate hike as soon as next month. The reading underscored intensifying inflationary pressures in the economy, and comes just after Bank of Japan (BOJ) Deputy Governor Ryozo Himino stressed that central banks must preserve market confidence in their commitment to rein in inflation. “With real interest rates remaining very low, our policy rate is expected to continue rising in accordance to economic, price and financial developments,“ Himino said. The core consumer inflation rate excluding one-off factors, as measured by the central bank’s new gauge, hit 2.8% in April, accelerating from 2.5% in March, according to BOJ data. The new index, which strips out institutional factors such as education and energy-related subsidies, showed a much faster year-on-year rise than the 1.4% rate in the benchmark core consumer price index figure the government announced last week. The BOJ began disclosing the data from March to enhance communication on underlying inflation, seen as crucial to its rate hike decisions. The reading for April may cement market expectations for a rate hike next month by showing how inflation remained above its target when excluding the effect of government subsidies, analysts say. The government has introduced various temporary subsidies to cushion the economic blow from rising living costs, which has weighed on inflation and made it more difficult for policymakers to gauge the broader price trend. The administration of Prime Minister Sanae Takaichi also announced a plan on Monday to compile an extra budget to subsidise fuel costs and help tackle cost of living pressures. Critics warn that the additional spending could backfire by fuelling inflation in an economy already strained by high fuel costs, rising import prices due to a weak yen, and mounting wage pressures from a tightening labour market. – Reuters COLOMBO: Sri Lanka’s central bank stunned markets by raising its policy rate by an outsized 100 basis points yesterday, the biggest hike in three years, as policymakers scrambled to stem inflation and support a currency buckling under soaring energy prices. Economic growth in the South Asian nation, only just recovering from a devastating 2022 financial crisis that left businesses and households deeply scarred, is expected to take a hit from the turmoil in the Middle East. The Central Bank of Sri Lanka (CBSL) raised the overnight policy rate to 8.75% from 7.75%, blaming higher inflation and a depreciating rupee due to the US-Israeli war with Iran. Seven out of a dozen economists and analysts polled by Reuters had forecast only a 25 basis-point or slightly higher change to the rate, citing the deepening impact on foreign reserves from the conflict and the rupee currency’s 8.7% tumble since early March. “Today’s sharp increase in interest rates in Sri Lanka highlights the country’s vulnerability to the crisis in the Middle East, and is unlikely to be the last unless the crisis subsides soon,” Capital Economics’ senior Asia economist Gareth Leather said. At a post-policy press conference, Governor P. Nandalal Weerasinghe said the CBSL’s expectation is for economic growth and inflation to maintain a “reasonable” pace.

o Shock therapy comes as Iran war fuels inflation and hammers currency “This hike will help stabilise exchange rates and inflation,” Weerasinghe said. Sri Lanka, fully reliant on imported fuel, has been battered by the Iran war-driven energy shock that has forced a 40% fuel price hike, rationing, and even public holidays on Wednesdays. Annual inflation has jumped from 2.2% in March to 5.4% last month, although that is well below the 70% peak during the crisis. Headline inflation is likely to remain above the target of 5% in the period ahead, before easing and stabilising around it, the CBSL said in its statement.

Emerging economies are bearing the brunt of the Iran war as soaring energy prices, supply disruptions, and capital outflows threaten to trigger stagflation. India, which depends heavily on overseas crude imports, is grappling with a sharp decline in the rupee, forcing the central bank to step in to defend the currency. Sri Lanka’s reserves decreased 3.8% to $6.7 billion in April after it spent US$1.5 billion on fuel imports in the first four months of the year, with the fuel bill surging 77% in March alone. The island, backed by a US$2.9 billion International Monetary Fund programme, is clawing its way out of the 2022 upheaval triggered by a severe shortage of dollars. The IMF board meets today to decide on a US$700 million tranche to Sri Lanka under the programme, which would help bolster its reserves. – Reuters

Sri Lanka’s stock market was down 0.7% after the policy announcement, while the currency hugged tight ranges to fetch 321 rupees per dollar. Tuesday’s rate hike - the first change since a 25-basis-point cut in May 2025 aimed at boosting growth - marked the largest increase since a similarly sized move during the depths of the financial crisis in March 2023. “This 100bps rate hike suggests the CBSL is shifting gears from supporting growth to defending price stability,” said Udeeshan Jonas, strategy head at Colombo-based equity research firm CAL. He has cut his 2026 growth forecast to 3.0% from 4.2% following the move. The central bank and Finance Ministry had forecast growth of between 4% and 5% in January. Governor Weerasinghe said Sri Lanka could still grow at the “lower band of the 4%- 5%” projection.

Xi and Shehbaz attend a meeting at the Great Hall of the People in Beijing. – REUTERSPIC

China, Pakistan aim to revamp economic corridor BEIJING: China and Pakistan have reached a“new broad consensus” on deepening strategic ties to beef up development of a joint economic corridor and establish the port of Gwadar as a regional connectivity hub, the neighbours said yesterday. The remarks came in a joint statement as Pakistan’s Prime Minister Shehbaz Sharif wrapped up a visit to Beijing at a time when Islamabad is seeking investment while navigating tension with Afghanistan and mediating in the Iran war. They agreed to promote “high-quality” development of CPEC, a flagship project of China’s Belt and Road initiative, develop Pakistan’s port of Gwadar, and strengthen road and port links. These plans encompass the Khunjerab Pass and an upgrade of the Karakoram Highway, the main overland link between China and Pakistan. Both reiterated support for early adoption of a five-point initiative to restore Middle East peace, offering to make positive contributions towards it. Pakistan reaffirmed its commitment to the one-China principle, calling the democratically governed island of Taiwan, claimed by China, an “inalienable” part of China and saying it opposed any form of Taiwan independence. Taiwan rejects China’s claims, saying only the island’s people can decide its future. Pakistan welcomed China’s efforts to boost its dialogue with Afghanistan.

Pakistan also promised targeted steps to boost security and cooperation to ensure the safety of Chinese workers and investments in Pakistan, a key concern for Beijing after repeated militant attacks on its nationals and projects. China said it appreciated Pakistan’s efforts in easing the temporary US-Iran ceasefire and hold talks in Islamabad.

“Both sides welcomed third parties to participate in the development of the China-Pakistan Economic Corridor under the model agreed,“ they said in the statement, issued after Shehbaz met Chinese President Xi Jinping and Premier Li Qiang.

Both opposed the use of territory by groups, such as the Tehreek-e-Taliban Pakistan and Eastern Turkistan Islamic Movement, to imperil regional security or launch attacks. – Reuters