Sri Lanka's central bank raised its key interest rates by a full percentage point on Thursday after inflation exceeded 50 percent amid the economy facing severe foreign exchange shortages to pay import bills.
The Monetary Board of the Central Bank of Sri Lanka hiked its standing lending facility rate by 100 basis points to 15.50 percent and the standing deposit facility rate to 14.50 percent.
The bank had lifted the rates by a massive 700 basis points in April before maintaining the rates in May.
The board was of the view that a further monetary policy tightening would be necessary to contain any build-up of adverse inflation expectations, the bank said in a statement.
The bank said it is prepared to take further policy measures as appropriate to help reinforce greater stability in the economy in the period ahead, while ensuring a faster return of inflation to the targeted 4-6 percent range over the medium term.
Consumer price inflation had surged to a record 54.6 percent in June.
In the second quarter, the economic activity has been severely affected by the continued supply side disruptions, primarily due to the shortages of power and energy. The bank expects a notable downturn in the near-term.
With inflation running at over 50 percent, more tightening seems likely, Capital Economics economist Gareth Leather said. While further rate hikes are likely, the economist said it is an International Monetary Fund deal that holds the key to restoring economic stability.
