Sri Lanka's central.bank hikes rates as it seeks to curb rising prices

The Sri Lankan central bank raised interest rates on Thursday, as expected, to curb growing inflationary pressures in the economy but said the current rise in prices was largely fuelled by supply side disruptions which were expected to be transitory.

The rate increase will also help ease pressures on the external sector as the island nation battles a massive debt repayment crisis which several believe could end up with the country defaulting for the first time in its history.

The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 50 basis points (bps) each to 5.50% and 6.50%, respectively.

A Reuters poll of 13 economists showed 6 out of the 7 economists who saw an increase had predicted a 50 bps rise in both the SDFR and SLFR, while the rest saw no change.

"The Monetary Board was of the view that the above measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability," the central bank said in a statement.

The CBSL had been the first central bank in Asia to tighten policy in the pandemic era by raising rates by 50 bps in August last year and then held rates in October and November.

"We can't keep the rates low and accelerate the economy and expect investors to invest when the country is facing a severe balance of payments crisis," said Dhananath Fernando, Economic Analyst at Advocata Institute.

The CBSL has a mandate of keeping inflation within the 4%-6% band, but latest data showed inflation hit a 12-year high of 12.1% in December, up from 9.9% the previous month, on the back of global commodity prices and domestic food supply shortages.