Sri Lanka Raises Rates for First Time Since 2012 to Buoy Rupee

  • Risks to macroeconomic stability continue, central bank says
  • Government seeking IMF program to keep borrowing costs low

Sri Lanka raised its benchmark rates for the first time in four years to support the rupee after it fell to a record low during the recent global sell-off.

The Central Bank of Sri Lanka increased its standing lending facility rate to 8 percent from 7.5 percent and standing deposit facility rate to 6.5 percent from 6 percent, it said in a statement on Friday. One of seven economists in a Bloomberg survey had forecast a 50 basis point increase in both rates, two saw a 25-basis point rise, and four predicted no change.

“The excessive growth of broad money fueled by domestic credit expansion in the midst of continued upward trend in underlying inflation requires pre-emptive policy measures in order to contain further build-up of demand driven inflationary pressures,” the bank said.

Sri Lanka joins South Africa and Mexico in tightening policy this year as Prime Minister Ranil Wickremesinghe seeks help from the International Monetary Fund to restrain borrowing costs. The rupee dropped to a record low last month after the central bank in September eased intervention, as a deteriorating balance of payments and slowing revenue erode finances.

Central Bank Governor Arjuna Mahendran had raised the statutory reserve ratio from last month for the first time since 2011 to cool monetary expansion and keep inflation in check. While consumer price gains slowed in January to a four-month low of 0.9 percent, the increase compares with price drops in mid-2015. Gross domestic product grew 4.8 percent in July-September after a 6 percent expansion the previous quarter. 

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