Sri Lanka's rate hike shows commitment to rapid disinflation - IMF

Sri Lanka's decision to raise interest rates shows the crisis-hit country's commitment to reducing inflation quickly towards single-digit levels, the International Monetary Fund (IMF) said on Saturday.

In a surprise move, the South Asia nation's central bank raised rates by 100 basis points on Friday to battle inflation, which is at 50.6%. The government is awaiting approval of a $2.9 billion IMF bailout package as it endures its worst financial crisis since independence from Britain in 1948.

"Sri Lanka's inflation is declining but remains at a very high level, which has been disproportionally hurting the poor, the IMF said in a statement. "Upside inflation risks could reverse the trend and lead to persistently high inflation which is extremely costly to the economy."

Durable disinflation would help boost market confidence in the island nation, reduce excessive risk premia of government securities and ease the financing conditions for companies, which supports recovery, the global lender said.

The central bank raised its standing deposit facility rate to 15.50% and its standing lending facility rate to 16.50%, and said it would relax its currency band to move towards a market-determined exchange rate as it seeks to secure the bailout.

The bank raised rates by 950 bps in the first half of last year to contain the country's financial crisis. But Friday's rate hike, the first since July, was largely unexpected by analysts and economists.

The IMF also backed tax hikes and power tariff increases implemented this year, which have drawn protests from public workers who have demanded a fairer taxation policy from the government.

Sri Lanka is pushing for finalisation of a four-year Extended Fund Facility and is expecting IMF board level approval this month, its central bank chief said on Friday.