Sri Lanka central bank raises rates, targets inflation despite contraction in economy
The Hindu
With foreign exchange reserves at a record low, the island nation is struggling to pay for essentials such as food, medicine and fuel.
Sri Lanka's central bank raised key interest rates to the highest in two decades on July 7 to bring down record inflation, despite the country wilting under a devastating economic crisis.
With foreign exchange reserves at a record low, the island nation is struggling to pay for essentials such as food, medicine and fuel. Growth has been stifled — the economy contracted an annual 1.6% in the January to March period and is expected to have shrunk more in the second quarter.
Inflation though touched a record 54.6% year-over-year in June while food inflation accelerated to 80.1%, prompting the central bank to raise rates to address the rise in prices as a priority.
The bank increased the standing lending facility rate by 100 basis points to 15.50% while the standing deposit facility rate was similarly raised to 14.50%, the highest since August, 2001.
"The Board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations," the central bank said in a statement.
There has been a significant progress made in negotiations with the International Monetary Fund (IMF) for a credit facility while negotiations are on with bilateral and multilateral partners to secure bridge financing and ease the shortfall in reserves, the central bank said.
"There has been a change in stance from the central bank, perhaps following discussions with the IMF," said Dimantha Mathew, Head of Research at First Capital.