I found out today that Transmit (still) has difficulty dealing with password-encrypted keys.
In this case you need to add the key you created to your computer's keychain using
ssh-add -K path/to/.ssh/key-name .
You then set up your SFTP connection in Transmit with the IP/URL and your user name, but do not specify a password or choose a key file. Save. Connect.
ls -la ~/.ssh