Sri Lanka raised interest rates to the highest level in two decades yesterday, saying it had to head off runaway inflation to avoid even deeper pain for an economy that is already in crisis and is shrinking.
The Central Bank increased its standing lending facility rate LKSLFR=ECI by 100 basis points to 15.50 per cent, while the standing deposit facility rate LKSDFR=ECI was similarly raised to 14.50 per cent, the highest since August, 2001.
Inflation touched a year-on-year record of 54.6 per cent in June, and Central Bank Governor P. Nandalal Weerasinghe said it could go as high as 70 per cent, prompting the Central Bank to raise rates to address the rise in prices.
“We will work to manage inflation as much as possible but other measures such as cash transfers will also be needed to give relief to the poor,” he told reporters. Interest rate rises, however, would further dampen economic growth in the Island Nation. The country is struggling to pay for food, medicine and fuel, with foreign exchange reserves at a record low.
The economy contracted by an annual 1.6 per cent in the first quarter and is forecast to have shrunk more in the second. Sri Lanka is pushing for a possible USD 3 billion extended financing programme from the International Monetary Fund (IMF) which would help it unlock other bridge financing options to pay for essential imports. The Central Bank said in a statement that significant progress had been made in talks with the IMF, while negotiations are underway with bilateral and multilateral partners to secure bridge financing and ease the shortfall in reserves.
“One recommendation in the IMF programme is to support the poor and vulnerable as high inflation will have the most impact on them,” Weerasinghe said. The Central Bank expects inflation to touch 70 per cent in the near term and stay higher for another year, but a fall in global crude and commodity prices may help bring it down sooner, he added.