The island of 22 million people is caught in a severe dollar shortage and is struggling to pay for essential imports of medicine, food and, critically, fuel.
The Central Bank of Sri Lanka (CBSL) kept its standing deposit facility rate unchanged at 13.50% and standing lending facility rate at 14.50% in May after raising both by a record 700 basis points in April.
Ten of a dozen economists and analysts polled by Reuters said they expected a rate increase ranging between 100 and 300 basis points after retail prices rose 54.6% while food prices were 80.1% higher in June from a year earlier.
“A rate hike is expected to ease currency pressure to some extent but inflation is expected to see a sharp increase once fuel and power price hikes are announced, possibly in the coming weeks,” said Lakshini Fernando, macroeconomist at Colombo-based investment firm Asia Securities.
Inflation could end the year at 60%, Prime Minister Ranil Wickremesinghe told parliament on Tuesday as the government prepares to present its debt restructuring framework to the International Monetary Fund (IMF) in August.
Interest rate rises, however, would further dampen economic growth in the island nation. Sri Lanka recorded a contraction of 1.6% on year in the first quarter and for the year as a whole is seen contracting by 4-5%.
Last week, the IMF said talks with Sri Lankan authorities had been constructive, raising hopes it would soon grant preliminary approval for a desperately needed financial support package.
But time is limited for the country trying to pay for new fuel shipments. This week, it extended a countrywide school closure, asked public employees to work from home, and limited supplies to essential services to stretch out meager supplies. (Editing by Swati Bhat; Editing by Robert Birsel)