Sri Lanka central bank raises interest rates as inflation worries mount

Sri Lankan central bank raised interest rates, its second straight increase, to curb growing inflationary pressures amid an ongoing foreign exchange crisis that threatens to derail domestic economy

The Sri Lankan central bank raised interest rates as expected on Friday, its second straight increase, to curb growing inflationary pressures amid an ongoing foreign exchange crisis that threatens to derail the domestic economy.
 

The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 100 basis points each to 6.50% and 7.50%, respectively. The median estimate in a Reuters poll of 13 economists was for the two rates to be raised by 50 basis points each. But the 10 who said rates will go up were equally divided on the quantum of increase between 50 and 100.
 

"While inflationary pressures are expected to remain elevated in the near term, the pressures emanating from the build-up of aggregate demand require proactive measures to anchor inflation expectations and retrace inflation to the desired levels over the medium term," the central bank said in a statement.
 

CBSL raised rates by 50 bps in January to tackle inflation, having earlier held rates steady after being among the first central banks to raise rates in the post-pandemic era in August last year. Retail inflation in February reached 15.1% while food inflation hit 25.7% - the highest in a decade. CBSL targets to hold inflation in a 4-6% range over the medium term.
 

With foreign exchange reserves dwindling, Sri Lanka has been unable to pay for enough fuel to fire its power plants, and the country has implemented rolling power cuts of over 7 hours across the country. "Rate change is unlikely to support the external challenges. To address those, we need to attract inflows, which will be done though the correction of the currency," said Lakshini Fernando, macroeconomist for Asha Securities.
 

The International Monetary Fund (IMF) in its latest Article IV assessment backed tightening monetary policy and reducing money printing to reduce inflationary pressure. It also supported free floating the currency, which has been held at 200-203 rupees per dollar in a closely managed float since last October. "The country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years," the IMF said.