Sri Lanka's central bank raises key rates to curb inflation

Sri Lanka’s Central Bank has raised its key interest rates to 14.50% and 15.50% to try to contain inflation that has added to the country's economic woes

Sri Lanka (Copyright 2022 The Associated Press. All rights reserved)

Sri Lanka’s Central Bank has raised its key interest rates to 14.50% and 15.50% to try to contain inflation that has added to the country’s economic woes.

Recent price hikes have been a severe blow, especially for the South Asian country’s poor and vulnerable groups as they endure their country’s worst economic crisis in memory, struggling with acute shortages of essentials such as food, fuel, cooking gas and medicines.

The central bank said it had raised its Standing Deposit Facility Rate by 100 basis points to 14.50%. The move is expected to help draw more funds into the banking sector. It also raised the Standing Lending Facility Rate that it charges commercial banks by 100 basis points, to 15.50%.

The bank said it would need to tighten its monetary policy further to fully curb inflation, which rose to nearly 55% in June, while food inflation topped 80%.

“Our priority is to bring down inflation to at least a reasonable level as soon as possible. The sooner the better,” said the central bank governor, Nandalal Weerasinghe.

Prices of most essentials have tripled in recent months and the most people are struggling to pay for their basic needs. About 70% of Sri Lankan households surveyed by UNICEF in May reported cutting back on food consumption. Many families rely on government rice handouts and charitable donations.

The central bank said Sri Lanka’s economy is estimated to have contracted 1.6% from a year earlier in the first quarter of the year. Shortages of fuel and electricity have further crimped economic activity in April-June.

Even though the economy already has slowed, the interest rate hikes would help temper expectations for further price increases, aiding the central bank in bringing inflation down to a target of 6%-7%, the central bank said in a statement.

Due to the acute fuel and power shortages, Sri Lanka has kept schools shut for weeks, while the government has asked state employees other than those in essential services to work from home.

This week, daily three-hour power cuts went into effect.

Strapped by dwindling foreign reserves, Sri Lanka has suspended repayment on foreign debts worth about $7 billion that were due this year.

The country is negotiating with the International Monetary Fund on a bailout package, but the country’s prime minister Ranil Wickremesinghe said this week that the negotiations were proving complex and difficult because Sri Lanka is effectively bankrupt.

The economic meltdown has triggered a political crisis, with widespread anti-government protests erupting across the country. Protesters have blocked main roads to demand gas and fuel, and television stations showed people in some areas fighting over limited stocks.

In the capital, Colombo, protesters have been occupying the entrance to the president’s office for more than two months to demand President Gotabaya Rajapaksa’s resignation. They accuse him and his powerful family, which includes several siblings who until recently held top government positions, of precipitating the crisis through corruption and misrule.