COLOMBO (AFP) – Sri Lanka’s central bank hiked interest rates yesterday in a bid to tame rampant inflation and discourage consumer spending as the country suffers a foreign currency shortage and teeters on the brink of default.
The island nation of around 22 million has seen shortages of food and fuel as well as electricity rationing, with rating agencies warning it might not be able to meet repayments on its debts. Inflation hit a record 12.1 per cent last month.
The central bank raised the benchmark deposit and lending rates by 50 basis points each to 5.5 per cent and 6.5 per cent respectively. The hike was the first since August.
It said in a statement that the higher borrowing costs would encourage savings and discourage consumption, thereby reducing demand for imports at a time when the country’s foreign reserves were under pressure.
“We want to give a very clear message that… inflation was being dealt with,” bank governor Ajith Nivard Cabraal told reporters.
The island’s tourism sector and worker remittances, the government’s main sources of income, have been battered by the pandemic.
It said the economy grew four per cent last year, having suffered a record 3.6 per cent contraction in 2020.
Colombo insists it will honour obligations on its USD35 billion in external debt, and Cabraal again insisted that a bailout from the International Monetary Fund (IMF) was unnecessary.