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© . Sri Lanka’s Central Bank Governor Ajith Nivard Cabraal speaks at a press conference in Colombo, Sri Lanka, March 4, 2022. REUTERS/Dinuka Liyanawatte
By Uditha Jayasinghe and Swati Bhat COLOMBO () – Sri Lanka’s central bank on Friday sharply raised interest rates to quell growing inflationary pressures and urged the government to consider measures including curbing non-essential imports and raising fuel prices to ease pressure on the ailing economy. The Central Bank of Sri Lanka (CBSL) raised the rate on the permanent deposit facility and the rate on the permanent lending facility by 100 basis points (bps) each to 6.50% and 7.50% respectively. The median estimate in a poll of 13 economists was that the two rates would be increased by 50 basis points each. “We want to be clear that we want to address inflation as one of the top concerns,” CBSL governor Ajith Nivard Cabraal said at his post-policy press conference. “We’ve had single-digit inflation for 13 years and we want to ensure price stability. We’re concerned about the increase, but we still feel it’s largely supply-driven.” More rate hikes in the coming months now seem inevitable, Capital Economics said in a note to clients, forecasting another 200bp of tightening this year. Retail inflation reached 15.1% in February, while food inflation reached 25.7% – the highest in a decade. CBSL aims to keep inflation within a range of 4-6% over the medium term. The CBSL said in its statement that economic activity has been impacted by recent adverse global developments and rising commodity prices. Now that foreign exchange reserves are dwindling, Sri Lanka has been unable to afford enough fuel to run its power plants and has pushed through the power cuts. “These disruptions need to be addressed immediately to ensure continued uninterrupted domestic production and export momentum,” the central bank said. GOVERNMENT ACTION EXPECTED The central bank has prepared a list of recommendations to the government, including a request to further stimulate remittances and investment, curb non-urgent imports and raise fuel and electricity tariffs, among other things. Cabraal said that while some measures may seem unpopular, they will help free up resources. “There is no problem between me and the finance minister. But at the policy level, we have a responsibility to raise certain policy issues and get things across to the government,” Cabraal said in response to a question about a possible split with the government. The International Monetary Fund said this week that Sri Lanka must tighten its monetary policy to contain inflation, get its high debt repayments on track and reverse one of the worst financial crises the country has faced in years. . Cabraal reiterated that past debt repayments have been made and that the central bank is committed to making all future repayments. Reserves have fallen 70% since 2020 to $2.36 billion at the end of January. The island has debt repayments of about $4 billion for the remainder of this year. “CBSL should maintain this momentum in monetary tightening and allow the currency to float,” said Udeeshan Jonas, chief strategist at CAL Group. Disclaimer: Fusion Media would like to remind you that the data on this website is not necessarily real-time or accurate. All CFDs (Stocks, Indices, Futures) and Forex prices are not provided by exchanges but rather by market makers, and therefore prices may not be accurate and may differ from the actual market price meaning prices are indicative and not suitable for trading purposes . Therefore, Fusion Media does not bear any responsibility for any trading losses that you may incur as a result of using this data. Fusion Media or anyone associated with Fusion Media accepts no liability for any loss or damage resulting from reliance on any information, including data, quotes, charts and buy/sell signals on this website. Be fully informed about the risks and costs associated with trading the financial markets, it is one of the riskiest forms of investment possible.