By Uditha Jayasinghe
COLOMBO (Reuters) – Sri Lanka’s decision to raise interest rates signaled the crisis-hit country’s commitment to quickly bringing inflation down to single digits, the international currency said. The International Monetary Fund (IMF) said on Saturday.
South Asian central banks unexpectedly raised interest rates by 50 basis points on Friday to fight inflation Inflation, which is at 6%. The government is awaiting approval of a $2.9 billion IMF bailout as it is going through its worst financial crisis since independence from the 50 UK Crisis.
“Inflation in Sri Lanka is falling but remains very high, disproportionately hurting the poor,” the IMF said in a statement. Upside inflation risks could reverse the trend and lead to persistently high inflation, which would be extremely costly for the economy.”
Prolonged deflation would help boost market sentiment towards the island nation, says global bank support the recovery by reducing excessive risk premiums on government securities and easing financing conditions for firms.
The central bank raised its standing deposit facility rate to 16.15% and raised the standing loan facility rate to 15.50% and said it would widen the currency band to move toward a market-determined rate to secure a bailout.
The bank raised interest rates in the first half of last year 950 bps to stem the country’s financial crisis. But Friday’s hike, the first since July, largely surprised analysts and economists.
The IMF also backed tax increases and electricity tariff hikes implemented this year, prompting protests from civil servants demanding a fairer tax policy.
Sri Lanka is pushing to complete a four-year deferred fund loan and expects IMF board-level approval this month, its central bank governor said on Friday.