Sri Lanka c.bank raises rates, targets inflation despite contraction in economy

People walking through the main entrance of the Central Bank of Sri Lanka in Colombo, Sri Lanka March 24, 2017. REUTERS / Dinuka Liyanawatte

COLOMBO, July 7 (Reuters) – Sri Lanka’s largest bank raised interest rates over a 20-year period on Thursday to lower inflation, despite the country’s deteriorating economic situation.

With the cost of foreign exchange falling sharply, the island nation is struggling to pay for basic services, such as food, medicine, and fuel. Growth has slowed – the economy performed 1.6% year-on-year from January to March and is expected to decline sharply in the second quarter.

The fall in prices even affected 54.6% year-on-year in June when food price hikes rose to 80.1%, prompting the central bank to raise prices to end inflation as a key factor.

The bank raised interest rates (LKSLFR = ECI) by 100 basis points to 15.50% while interest rates (LKSDFR = ECI) were raised to 14.50%, the highest level since August, 2001.

“The commission recognized that tightening the monetary policy plan would be necessary to ensure that any incentives that are offered as a result of lower inflation,” the central bank said. read more

There has been significant progress in negotiations with the International Monetary Fund (IMF) for loans while negotiations are underway between the two countries and other countries to secure funding for bridge maintenance and reduce the shortage of stocks, the central bank said.

“There has been a change from the central bank, probably following negotiations with the IMF,” said Dimantha Mathew, head of research at First Capital.

“I don’t think they are worried about the overall growth and they have changed their mindset to reduce cash flow and print money to stabilize the economy,” he added.

The central bank estimates that growth will be 4% to 5% this year, with inflation reaching 60% by the end of the year, Prime Minister Ranil Wickremesinghe told parliament on Tuesday, although the government wants a slight 1% reduction in subsequent growth. year.

The central bank also said that ensuring foreign stability and economic stability requires the commitment of all stakeholders and called for concerted and consistent action, including by the government.

“The rapid implementation of the expected economic reforms to strengthen public finances and streamline spending is essential,” it said, adding that economic transformation in public enterprises was also important.

It added that over time, this would reduce government spending and help reduce inflation more quickly.

Sri Lanka is expected to present a long-term budget to parliament in August, which will include new ways to raise funds and reduce spending, Wickremesinghe told parliament last month.

The International Monetary Fund (IMF) has said it needs to tighten its grip on the economy and boost its debt resilience after a 10-day tour of the country at the end of last month.

Sri Lanka is pushing for a $ 3 billion additional funding program from the IMF that will help open up more sources of revenue for imports.

Sri Lanka hopes to hold a meeting of donors with the involvement of China, India and Japan following a working agreement with the IMF and will provide a stable loan plan for the global lender by August.

Edited by Raju Gopalakrishnan

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