Sri Lanka increases key interest rates to 21-year high to fight inflation

In an effort to fight inflation due to the ongoing economic crisis, the Monetary Board of the Central Bank of Sri Lanka's decided to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 100 basis points to 14.50 per cent and 15.50 per cent, respectively.

This was done to tackle the rising domestic inflation, the bank said, adding that these rates are at the highest in 21 years, reports Xinhua news agency.

The central bank said that they had noted a higher-than-expected increase in headline inflation recently.

The high inflation is expected to remain in the period ahead, thus the Monetary Board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations.

The central bank said that the policy adjustments would help Sri Lanka stabilise its inflation to between 4 and 6 percent in the medium term.

The bank said that they considered the impact of tighter monetary conditions on overall economic activity, including the micro, small, and medium scale businesses, and the financial sector performance, among others, against far-reaching adverse consequences of any escalation of price pressures across all sectors of the economy in the near term.

The bank raised rates by 700 basis points in April but made no further moves at its previous policy meeting in May.

It comes as annual inflation hit a record high of 54.6 per cent June as the cost of food rose by more than 80 per cent amid the crisis.

The island nation of 22 million people has witnessed its foreign exchange reserves shrink due to economic mismanagement and the impact of the Covid-19 pandemic.

As a result it has struggled to pay for imports of essential goods, including fuel, food and medicine.

In May, it defaulted on its debts for the first time in its history after a 30-day grace period to come up with $78 million of unpaid debt interest payments expired.

The country is currently in negotiations with the International Monetary Fund (IMF) over a bailout.

Sri Lanka's government has said it needs $5 billion this year in support from the international community, including the IMF.