IMF Says Sri Lanka May Have to Raise Rates as Central Bank Keeps Them Low

02nd February 2011, www.bloomberg.com

The International Monetary Fund said Sri Lanka should be prepared to raise interest rates if inflation risks increase.

“With few signs of demand-driven inflation pressures, the policy stance remains appropriate, but the central bank should be ready to act to head off any emerging inflation risks,” IMF Deputy Managing Director Naoyuki Shinohara said in an e-mailed statement after an IMF board meeting that enabled the disbursement of $217 million as part of a $2.59 billion loan.

IMF Managing Director Dominique Strauss-Kahn said yesterday Asian central banks may need to raise borrowing costs to limit the risk of overheating in their economies. Sri Lanka central bank Deputy Governor Dharma Dheerasinghe said in an interview this week that the country will keep interest rates “low” after inflation slowed for a second straight month in January.

“The central bank has been building up reserves while allowing the exchange rate to appreciate,” Shinohara said. “Looking ahead, however, the exchange rate will need to be sufficiently flexible in both directions to safeguard external stability.”

The IMF said that the country has made “good progress” on the economic policies attached to the loan and said that growth “is strengthening” while inflation “remains in check.”

To contact the reporter on this story: Sandrine Rastello in Paris at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net.

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• Sri Lanka Cuts Key Interest Rates Contrary to India and Thailand as Sri Lanka Inflation Slows for a Second Straight Month