Sri Lankan central bank raises key policy interest rates

In a move described by analysts as a step towards curbing soaring inflation, the Sri Lankan Central Bank here Saturday said that key policy interest rates have been raised.

"Having reviewed the recent economic developments and prospects, the Monetary Board at its meeting held on 21 July 2006 decided to increase the Repurchase (Repo) rate and the Reverse Repurchase ( Reverse Repo) rate by 12.5 basis points to 9.125 percent and 10. 625 percent, respectively, with effect from 24 July 2006," a Central Bank press release said.

The interest rates hike was the second such rise this year in order to curb inflation caused by higher global fuel prices. Analysts say further interest rate increases are necessary to check the inflationary pressures on the economy.

The rate of inflation averaged over 11 percent in 2005 with Central Bank at the end of June forecasting annual average inflation to be around 10 percent this year.

"Since inflation has been mostly a result of the demand pressure in the economy, the Monetary Board decided to further tighten the monetary policy to subdue the demand pressure, and to continue with aggressive open market operations," the release added.

The bank expects the economic growth to maintain its momentum. The Sri Lankan economy had expanded by 8.1 percent in the first quarter of this year, the bank announced but the analysts warn that any return to hostilities in the armed separatist conflict in the north and east regions with the Tamil Tiger rebels may dampen the prospect of high growth.

The upsurge of violence has cast a shadow on the Norwegian efforts to broker direct talks between the government and the Liberation Tigers of Tamil Eelam (LTTE).

What has been described as a low intensity war since the end of 2005 has cost nearly 900 lives.

Source: Xinhua