Sri Lanka’s central bank has raised interest rates to the highest level in two decades in a bid to reduce record inflation despite the country being hit by a devastating crisis.
With foreign exchange reserves at record lows, the island nation is struggling to pay for essentials such as food, medicine and fuel.
Growth has been stifled – the economy shrank 1.6% annually in the January-March period, and is expected to shrink further in the second quarter.
Inflation however hit a record 54.6% year-on-year in June, while food inflation jumped to 80.1%, prompting the central bank to raise interest rates to tackle rising prices as a priority.
The bank raised the lending facility rate by 100 basis points to 15.5%, while the deposit rate also increased by 100 basis points to 14.5%, the highest level since August 2001.
In its announcement, the central bank said that a further tightening of monetary policy would be necessary to contain a possible build-up of adverse inflation expectations.
At the same time, significant progress has been made in negotiations with the IMF for a credit facility, while negotiations continue with bilateral and multilateral partners to secure bridge financing and reduce the reserve shortfall.
Source: Capital
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