Sri Lanka’s central bank has raised interest rates to the highest level in more than 20 years as it battles to stem rising prices.
Inflation rose to almost 55% last month – with warnings it could rise to 70%.
Rising prices have made life incredibly difficult for the South Asian nation’s poorest, who have faced shortages of basic goods such as food, fuel and medicine during the worst economic crisis in living memory.
Prime Minister Ranil Wickremesinghe told lawmakers two weeks ago that the economy had “fallen apart.”
On Wednesday, he announced that he had called Russian leader Vladimir Putin to ask for credit support to help the country import fuel.
The central bank said it raised the fixed deposit line rate by 100 basis points to 14.50%, which is expected to help attract more funds to the banking sector.
The bank also increased the rate on permanent lending, which it charges from commercial banks, by 100 points to 15.50%.
The bank said it expects further tightening of monetary policy to fully curb inflation, which rose to nearly 55% in June, while food inflation topped 80%.
Bank chief Nandal Weerasinghe said, “Our priority is to reduce inflation to at least a reasonable level as soon as possible.” The sooner, the better.”
It is not uncommon for central banks to raise interest rates to keep inflation out of control.
Other central banks using this tactic include the Bank of England and the US Federal Reserve, but Sri Lanka faces challenges on a different scale.
“What the central bank has done is a step in the right direction, but it is too short given the high inflation rate of 55% now, which will accelerate to more than 80 to 1005 in the next two to three months,” said WA Wijewardena, – said the economist and former deputy head of the Central Bank of Sri Lanka.
Rising prices have hit Sri Lankan households hard.
About 70% of Sri Lankan households surveyed by UNICEF in May reported reducing food consumption.
Many families rely on government rice handouts and charitable donations.
The central bank reported that Sri Lanka’s economy shrank by 1.6% in the first quarter compared to last year.
Shortages of fuel and electricity further limited economic activity in April-June.
Although the economy has already slowed, the interest rate hike will help temper expectations of further price increases, helping to reduce inflation to a target of 6-7%, the central bank said in a statement.
Due to acute fuel and power shortages, Sri Lanka closed schools for weeks while the government asked civil servants, other than those in essential services, to work from home.
Daily three-hour blackouts also came into effect.
The crisis is leading to increased public unrest, with many blaming President Gatabaya Rajapaksa for the rapid decline in living conditions.
Police fired tear gas and water cannons against students who tried to march to the president’s home in Colombo today ahead of a planned rally calling for his resignation this weekend.
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