Sri Lanka raises key interest rates to curb inflation

Colombo - Sri Lanka's Central Bank raised its key short-term interest rates in a bid to check galloping inflation fuelled by high oil prices.

"The Repurchase (Repo) rate and the Reverse Repurchase (Reverse Repo) rate goes up by 12.5 basis points to 9.125 per cent and 10.625 per cent," the bank said in a statement following its monthly review of the economy.

The repo rate, or the interest paid by the Central Bank for deposits, is now at a three-and-a-half-year high. The Reverse Repo is the rate at which the Central Bank lends to commercial banks.

"The rise in fuel prices remains a concern in overall macroeconomic management," said the bank which also cited demand pressures in the economy for the rate increases.

Inflation climbed to a four-month high of 17.7 percent in June as the government increased retail oil prices to keep pace with world prices.

Treasury Secretary P.B. Jayasundera said last week skyrocketing oil prices were expected to cost the island $2.2 billion this year, up from $1.6 billion spent in 2005.

The economy grew by a better-than-expected 8.1 percent in the first quarter of this year, beating the most optimistic forecasts of around 7.0 percent.

But the bank warned the economy may slow amid intensified violence between the government and Tamil Tiger rebels despite a February 2002 truce pact. - AFP