Sri Lanka raises interest rates as inflation concerns rise

COLOMBO, March 4 (Reuters) – Sri Lanka’s central bank raised rates as expected to curb growing inflationary pressures and urged the government to consider measures such as cutting non-essential imports and raising oil prices. fuel to overcome the economic difficulties encountered.

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 from a Reuters poll of 13 economists called for both rates to rise by 50 basis points each. But the 10 who said rates would increase were evenly split on the quantum of increase between 50 and 100. read more

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“While inflationary pressures are expected to remain elevated in the near term, pressures emanating from aggregate demand buildup necessitate proactive measures to anchor inflation expectations and bring inflation back to desired levels over the medium term,” he said. CBSL in a press release. .

He said national economic activity has been affected by recent adverse global developments and soaring commodity prices which have disrupted supply chains and power supply.

With dwindling foreign exchange reserves, Sri Lanka has been unable to afford enough fuel to power its power plants, and the country has implemented power outages of over 7 hours across the country.

“These disruptions must be addressed immediately to ensure continued uninterrupted domestic production and export momentum,” he said.

Retail price inflation in February, however, reached 15.1% while food inflation reached 25.7%, the highest in a decade. CBSL aims to keep inflation within a range of 4-6% over the medium term.

CBSL made a list of recommendations to the government asking it to encourage more remittances and investments, reduce non-emergency imports, increase fuel and electricity tariffs, monetize non-strategic assets and underutilized, among others.

The International Monetary Fund said earlier this week that Sri Lanka needed to tighten monetary policy to contain rising inflation, get its high debt repayments back on track and reverse one of the country’s worst financial crises. have known for years.

Sri Lanka’s reserves have fallen 70% since 2020, falling to $2.36 billion at the end of January. But the island has debt repayments of about $4 billion this year. The scarcity of the dollar prompted some analysts and rating agencies to warn of a potential default. Read more

“CBSL should maintain this monetary policy tightening momentum and allow the currency to float,” said Udeeshan Jonas, chief strategist at CAL Group.

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Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Simon Cameron-Moore

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