By Uditha Jayasinghe and Swati Bhat
COLOMBO (Reuters) – Sri Lanka’s central bank sharply raised interest rates on Friday to staunch growing inflationary pressures and urged the government to consider measures including curbing non-essential imports and raising fuel prices to reduce pressure on the ailing economy.
The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 100 basis points (bps) each to 6.50% and 7.50%, respectively.
The median estimate in a Reuters poll of 13 economists was for the two rates to be raised by 50 bps each.
“We want to be clear that we want to address inflation as one of the key concerns,” Ajith Nivard Cabraal, governor of the CBSL, said in his post policy news conference.
“We have had 13 years of single-digit inflation and we want to ensure price stability. We are concerned with the increase but we still feel these are largely supply side driven.”
More rate hikes in coming months now seem inevitable, Capital Economics said in a note to clients, pencilling in another 200 bps of tightening this year.
Retail inflation in February reached 15.1% while food inflation hit 25.7% – the highest in a decade. CBSL targets to hold inflation in a 4-6% range over the medium term.
The CBSL in its statement said economic activity has been affected by recent adverse global developments and surging commodity prices.
With its foreign exchange reserves dwindling, Sri Lanka has been unable to pay for enough fuel to fire its power plants, and has implemented rolling power cuts.
“These disruptions have to be addressed immediately to ensure the continuation of uninterrupted domestic production and the momentum in exports,” the central bank said.
GOVT ACTION AWAITED
The central bank made a list of recommendations to the government, including asking it to incentivise remittances and investments further, curb non-urgent imports and raise fuel and electricity tariffs, among other things.
Cabraal said though some measures may seem unpopular, they will help free up resources.
“There is no issue between me and the finance minister. But at a policy level we have a responsibility to raise certain policy issues and convey things to the government,” Cabraal said in response to a question regarding a potential rift with the government.
The International Monetary Fund this week said Sri Lanka needs to tighten its monetary policy to contain inflation, put its high debt repayments on track and reverse one of the worst financial crises the country has faced in years.
Cabraal reiterated that the debt repayments have been met in the past and the central bank was committed to honouring all future repayments.
Reserves have plunged 70% since 2020, dwindling to $2.36 billion at the end of January. The island has debt repayments of about $4 billion in the remainder of this year.
“CBSL should maintain this momentum on tightening monetary policy and allow the currency to float,” said Udeeshan Jonas, chief strategist at CAL Group.
(Reporting by Swati Bhat and Uditha Jayasinghe; Editing by Simon Cameron-Moore and Kim Coghill)
