Cash-strapped Sri Lanka hiked interest rates by a percentage point on Friday, the second sharp hike in three months, as the central bank warned of 80 percent inflation and a painful recession.
The Central Bank of Sri Lanka raised its benchmark deposit and lending rates to 14.5 percent and 15.5 percent respectively after data showed inflation rose to a record 54.6 percent last month.
Officials said the increase is aimed at curbing runaway prices, which are expected to rise 80 percent by year-end, and reducing the build-up of demand pressures in the shaken economy.
Acute food and fuel shortages and protracted power outages have fueled months of widespread anti-government demonstrations calling for the resignation of President Gotabaya Rajapaksa.
The central bank said the economy could slip into recession this year after growing 3.7 percent last year and contracting 3.6 percent in 2020.
Prime Minister Ranil Wickremesinghe told parliament the economy could contract by as much as 7.0 percent.
The bank said economic activity in the second quarter of this year was severely impacted by power and fuel shortages, while all non-essential offices and schools were ordered to close in a bid to reduce commuting and conserve scarce energy.
The country is officially out of petrol and diesel, while new deliveries are at least two weeks away.
The government defaulted on its $51 billion foreign debt in April and is negotiating a possible bailout with the International Monetary Fund.
“Significant progress has been made in relation to negotiations with the IMF to reach a staff-level agreement on the Extended Fund Facility (EFF) arrangement in the near future,” the central bank said.
Negotiations are also underway with several bilateral and multilateral partners to secure bridge funding.
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