May 05, 2008 (LBO) – Sri Lanka’s central bank is keeping interest rates suppressed and below the inflation rate to reduce government borrowing costs and maintain a high growth rate that presents a ‘rosy’ picture, a researcher says. “Galloping inflation is also due to suppression of the interest rate by the government,” says Muttukrishna Sarvananthan, principal researcher of the Point Pedro Institute of Development, Point Pedro, a think tank in northern Sri Lanka.
The reverse repo rate has been constant and had not changed since February 2007 despite rising inflation.
“Suppression of interest rate has meant that there is negative real interest rate in the market (i.e. the nominal interest rates have been lower than the rates of inflation),” he says in a paper on the economy of peace and conflict in Sri Lanka.
“Thus, negative real interest rate fuels borrowing by both the
private sector and the government, which in turn leads to demand-pull inflation.”
Sarvananthan says there are two reasons why the Central Bank is reluctant to increase the interest rate.
“One is to reduce the cost of borrowing to the government and the other is not to hamper economic growth.
“Interest rate rise would increase the