diff --git a/src/vs/platform/networkFilter/common/domainMatcher.ts b/src/vs/platform/networkFilter/common/domainMatcher.ts
index aafc49ea66148..8792930ddca15 100644
--- a/src/vs/platform/networkFilter/common/domainMatcher.ts
+++ b/src/vs/platform/networkFilter/common/domainMatcher.ts
@@ -120,7 +120,7 @@ export function extractDomainPattern(pattern: string): string {
  * @returns `true` if the domain matches the pattern.
  */
 export function matchesDomainPattern(domain: string, pattern: string): boolean {
-	const normalizedPattern = normalizeDomain(extractDomainPattern(pattern), pattern.includes('://'));
+	const normalizedPattern = normalizeDomain(extractDomainPattern(pattern), true);
 	if (!normalizedPattern) {
 		return false;
 	}
diff --git a/src/vs/platform/networkFilter/test/common/domainMatcher.test.ts b/src/vs/platform/networkFilter/test/common/domainMatcher.test.ts
index 43c70da1eb22f..a5667c0e7b42c 100644
--- a/src/vs/platform/networkFilter/test/common/domainMatcher.test.ts
+++ b/src/vs/platform/networkFilter/test/common/domainMatcher.test.ts
@@ -134,6 +134,11 @@ suite('domainMatcher', () => {
 		test('returns false for invalid pattern', () => {
 			assert.strictEqual(matchesDomainPattern('example.com', ''), false);
 		});
+
+		test('matches localhost pattern', () => {
+			assert.strictEqual(matchesDomainPattern('localhost', 'localhost'), true);
+			assert.strictEqual(matchesDomainPattern('localhost', 'other.com'), false);
+		});
 	});
 
 	suite('extractDomainFromUri', () => {
@@ -184,5 +189,10 @@ suite('domainMatcher', () => {
 			assert.strictEqual(isDomainAllowed('api.example.com', ['*.example.com'], []), true);
 			assert.strictEqual(isDomainAllowed('api.example.com', [], ['*.example.com']), false);
 		});
+
+		test('localhost is allowed when explicitly listed', () => {
+			assert.strictEqual(isDomainAllowed('localhost', ['localhost'], []), true);
+			assert.strictEqual(isDomainAllowed('localhost', [], ['localhost']), false);
+		});
 	});
 });