Sri Lanka’s central bank announced on Thursday (7th) that it would raise interest rates by 100 basis points to control record prices and the highest inflation in Asia and support the Sri Lankan currency. The central bank warned that inflation could soar as high as 70% as it faces severe shortages.
Sri Lanka’s central bank on Thursday raised its benchmark standing lending rate by 100 basis points (4 yards) to 15.5%, bringing the total rate hikes to 950 basis points this year.
The rapid rate hike by the central bank comes at a time when Sri Lanka is facing the threat of bankruptcy, currency devaluation and foreign exchange reserves have fallen, while CPI rose to a record 54.6% in June.
“The central bank’s monetary policy committee considers that further monetary policy tightening is necessary to contain any unfavorable inflation expectations,” Sri Lanka’s central bank said in a statement.
Domestic economic activity in the second quarter is expected to be severely affected by ongoing supply disruptions, mainly due to power and energy shortages, the central bank said.
Central bank governor Nandalal Weerasinghe said inflation would rise further in the coming months, possibly reaching 70% in the coming months.
Sri Lanka’s foreign exchange reserves fell to $1.86 billion at the end of June from $1.89 billion in May, including a $1.5 billion conditional swap with China, according to data released by the central bank on Thursday. Economic activity in the South Asian country has come to a halt and residents have been asked to stay home until July 10 to save fuel.
Weerasinghe believes that Sri Lanka will soon reach a rescue agreement with the International Monetary Fund (IMF), and the country will also commit to strong fiscal policy and structural reforms.