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To combat inflation, Sri Lanka's central bank raised interest rates to a 21-year high

Image: Reuters Berita 24 English - To combat record-high domestic inflation and to prevent an increase in underlying demand, the Central Ban...


Image: Reuters

Berita 24 English - To combat record-high domestic inflation and to prevent an increase in underlying demand, the Central Bank of Sri Lanka (CBSL) hiked its benchmark interest rates by a full percentage point on Thursday.

The Standing Deposit Facility Rate increased to 14.50 percent, the highest level in 21 years, while the Standing Lending Facility Rate increased to 15.50 percent.

In June, inflation reached a record high of 54.6 percent year-over-year, while food inflation spiked to 80.1%.

In a statement, CBSL stated that "The Board was of the opinion that a further monetary policy tightening would be necessary to contain any build-up of unfavourable inflation expectations."

According to the statement, the policy change would prevent the economy from seeing an increase in underlying demand pressures and assist anchor inflation expectations around the desired 4-6 percent range over the medium run.

The 22 million-person island is suffering from a serious foreign exchange deficit, making it difficult to pay for the importation of basic goods like fuel, fertiliser, food, and medicine.

The CBSL held rates constant at its previous policy meeting in May despite an enormous 700 basis point rate increase in April.

The persistent supply-side disruptions, which are principally brought on by the lack of energy and power, are projected to have had a significant negative impact on domestic economic activity during the second quarter of 2022, according to the central bank.

The negotiations with the International Monetary Fund for a credit facility have advanced significantly, and discussions with bilateral and multilateral partners are ongoing to find bridge finance, according to the CBSL.

The central bank is anchoring its decision on Sri Lanka experiencing dis-inflation in the second quarter of 2023, which is interesting, according to Udeeshan Jonas, chief strategist at equity research firm CAL. "Bond yields shot up on Wednesday on the expectations of about a 500 basis point increase," he added.

He continued, "It is evident the central bank is taking a measured approach and focused on real interest rates and not matching cost-push inflation given the global shifts, especially the falling decrease in oil prices.


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