Sri Lankan central bank raises interest rates, targets inflation

Despite the nation wilting under a terrible economic crisis, Sri Lanka's central bank increased key interest rates to the highest in two decades on July 7 in an effort to reduce record inflation.

Due to record-low foreign exchange reserves, the island nation is having trouble affording basic necessities including food, medication, and fuel. The economy shrank by 1.6 percent annually from January to March, and it is anticipated that it shrank even more in the second quarter, stifling growth.

The central bank raised rates to confront the rise in prices as a matter of priority even though inflation reached a record high of 54.6 percent year over year in June and food inflation surged to 80.1 percent.  The standing deposit facility rate was also boosted to 14.50 percent, the highest since August 2001, while the standing lending facility rate was lifted by 100 basis points to 15.50 percent.

The central bank stated in a statement that "the Board was of the view that a further tightening of monetary policy would be essential to contain any build-up of unfavourable inflation expectations."

The International Monetary Fund (IMF) credit facility negotiations have made great progress, and discussions with bilateral and multilateral partners are ongoing to find bridge funding and reduce the reserve deficiency, the central bank said.

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