Sri Lanka Sees Inflation Touching 40% After Holding Rates

(Bloomberg) -- Sri Lanka’s central bank warned Thursday that headline inflation will hit 40% in the next few months, while opting to hold borrowing costs steady as it lets previous tightening filter through the economy.

Governor Nandalal Weerasinghe said retail inflation, which quickened to almost 30% in April, will accelerate further amid a shortage of dollars to pay for imports to ease shortages of everything from food to fuel. He said there are signs of easing in underlying inflation that strips out volatile items.

“We are seeing some improvement, which means the things we are doing are working,” he said.

The Central Bank of Sri Lanka earlier in the day announced that it held its benchmark standing lending rate at 14.5%.

It said in a statement that previous policy measures unveiled last month, including a 700 basis-point rate increase and other steps to stem demand pressures, are expected to contain a further build-up of inflation expectations. In addition to seeing elevated inflation, the bank expects economic activity taking a hit in the coming months.

The central bank’s 850 basis points of rate increases this year so far appear to have done little to cool inflation, currently Asia’s fastest and a product of shortage of essential items made worse by global supply disruptions. With a dwindling supply of dollars, Sri Lanka is set to default on overseas bonds this week as efforts to secure emergency aid from overseas were upset by political turmoil at home.

President Gotabaya Rajapaksa, who is facing calls to quit over mismanagement of the economy, named Ranil Wickremesinghe as the new prime minister but is yet to name a finance chief to resume talks with the International Monetary Fund for bailout funds.

“Policy measures implemented by the central bank need to be reinforced by adequate and timely policy adjustments by the government,” the central bank said. “Urgent measures are required to restore greater political stability.”

Weerasinghe, who had earlier threatened to quit if political stability wasn’t restored, said Thursday that he intends to continue and that authorities have shared their plans to implement policy reforms with the IMF to secure aid.

(Updates with details throughout.)

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