Sri Lanka keen to tighten purse strings further

When Sri Lanka faced a rapidly weakening currency and galloping inflation in early 2001, its central bank raised interest rates. When Sri Lanka faced a rapidly weakening currency and galloping inflation in early 2001, its central bank raised interest rates. But it found that a tighter policy didn’t yield results until interest rates hit 20%. Together with a loan from the International Monetary Fund, the central bank managed to drag inflation down to 10.8% from 16%, but the rupee still ended the year 16% weaker against the dollar.

Three years later, the country is facing the same problems and is looking to apply the same remedy: Higher interest rates.

A combination of this year’s record high global oil prices and a weak rupee drove the country’s inflation, measured by the consumer price index, from a meek 0.5% in January to 12.1% in October, the last published data.

Inflation is expected to finish the year around 12%, sharply up from 2003’s 5%. With high oil prices likely to prevail into 2005, inflation is forecast at 7-12% for 2005.

The rupee, meanwhile, has fallen 8.5% against the U.S. dollar since t