COLOMBO: The Sri Lankan central bank raised interest rates yesterday, as expected, shifting its focus away from growth and back to controlling inflation in a bid to curb soaring imports and attract more foreign capital.
The island nation has reiterated its commitment to repaying the entire US$4bil (RM16.74bil) owed to investors in the rest of 2022 but in the absence of incoming dollars some analysts believe the country could face its first-ever default.
The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate (SDFR) and the standing lending facility rate (SLFR) by 50 basis points (bps) each to 5.5% and 6.5%, respectively.
A Reuters poll of 13 economists showed six out of the seven economists who saw an increase had predicted a 50 bps rise in both the SDFR and SLFR, while the rest saw no change.
“The Monetary Board was of the view that the above measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability,” the central bank said in a statement.
The CBSL had been the first central bank in Asia to tighten policy in the pandemic era by raising rates by 50 bps in August last year and then held rates steady in October and November.
“With this decision the central bank has shifted from being focused on growth to addressing inflation and external challenges as priorities,” said Udeeshan Jonas, chief strategist at CAL Group.
“An increase in rates will help reduce money printing and control excess liquidity from flowing into increased consumption”.
The CBSL has a mandate to keep inflation within a 4%-6% band, but the latest data showed inflation hit a 12-year high of 12.1% in December, up from 9.9% the previous month, on the back of rising commodity prices and domestic food supply shortages.
The CBSL revised down its projection for 2021 growth to 4%, from 5% previously, and said the recent uptick in inflation is expected to be transitory. — Reuters