On Tuesday, Sri Lanka's Central Bank raised its overnight policy rate by 100 basis points to 8.75% in response to surging oil prices driven by tensions in the Middle East. This move was prompted by April's inflation rate, which reached 5.4%, surpassing the bank's target of 5%. The bank highlighted that high global oil prices necessitated sharp increases in domestic energy costs, contributing to inflation and exerting pressure on the rupee. Despite some easing in depreciation pressures, the rupee remains vulnerable as Sri Lanka imports nearly all its petroleum, leaving it exposed to global price fluctuations. The central bank's decision reflects a shift towards aggressive monetary policy to stabilize the economy, which is still recovering from a severe balance of payments crisis in 2022 that resulted in an IMF bailout. With gross official reserves at $6.8 billion, the bank has limited capacity to absorb sustained high oil prices without further action. The effectiveness of this rate hike in anchoring inflation expectations and stabilizing the rupee will depend on the duration of the ongoing Middle East conflict and global oil price trends.