Borrowing costs

Sri Lanka raises borrowing costs to rein in record inflation

COLOMBO (BLOOMBERG) – Sri Lanka’s central bank has raised borrowing costs in a bid to contain record prices that have fueled Asia’s fastest inflation.

The Central Bank of Sri Lanka raised the benchmark rate on its standing lending facility by 100 basis points to 15.5% on Thursday (July 7th).

Six out of seven economists in a Bloomberg survey expected a rise of between 50 basis points and 300 basis points, while one expected a hold.

“The board was of the view that further monetary policy tightening would be needed to contain any buildup of adverse inflation expectations,” the central bank said in a statement.

The decision comes as prices continued their record high in June, amid continued shortages due to rapidly depleting foreign exchange reserves.

Prime Minister Ranil Wickremesinghe told parliament on Tuesday that the inflation rate would hit 60% in the coming months amid rising commodity prices and a falling currency.

Prior to Thursday’s decision, the country’s central bank had raised interest rates by 850 basis points since the start of the year, even as its economy contracted in the first quarter, marking the start of a painful and long recession for the country.

Economic activity also came to a screeching halt as the bankrupt nation asked residents to stay home until July 10 to save fuel.

“Domestic economic activity during the second quarter of 2022 is expected to have been severely affected by continued supply disruptions, primarily driven by power and energy shortages,” the central bank said.

The country’s currency stock remained stable at around $1.9 billion at the end of June, including $1.5 billion of Chinese currencies that are subject to terms of use, he said.