Sri Lanka Raises Rates to Fight Asia’s Second-Fastest Inflation

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Sri Lanka’s central bank raised borrowing costs for the first time in three meetings as policy makers sought to arrest price pressures in the economy and limit further contraction in growth.

The Central Bank of Sri Lanka increased the standing lending facility rate to 6.5% from 6% on Thursday. Only two of seven economists surveyed by Bloomberg predicted the move, with two others seeing a hike of 25 basis points to 200 basis points and the rest expecting no change. 

The monetary authority also raised the standing deposit facility rate to 5.5% from 5%, while holding the statutory reserve ratio at 4%.

The decision comes as headline inflation accelerated to 12.1% last month, making it the second-fastest pace in Asia after Pakistan’s 12.3%. While authorities maintained that the quickening trend was due to supply side shocks, they said tighter borrowing costs will curtail any underlying demand pressures in the economy as it finds itself with depleted foreign-exchange reserves to pay for imports.

“Such supply driven price pressures are expected to be transitory, although the possible build-up of demand driven inflationary pressures may compel the adoption of proactive monetary policy measures,” the central bank said in a statement.

The nation also needs to conserve dollars to service a $1 billion debt maturity in July, even as the economy finds itself in contraction territory with sectors such as tourism that previously drove growth hit by the pandemic. 

The monetary authority also announced:

• Distributing the financing of essential import bills for fuel purchases among licensed banks in proportion to their foreign exchange inflows
• Mandating all registered tourist establishments to accept foreign exchange only in respect of services rendered to persons resident outside Sri Lanka
• Extending a remittance incentive program until April 30

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