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COLOMBO: The Sri Lankan central bank raised interest rates on Thursday, as expected, shifting its focus away from growth and back to controlling inflation in a bid to curb soaring imports and attract more foreign capital.

The island nation has reiterated its commitment to repaying the entire $4 billion owed to investors in the rest of 2022 but in the absence of incoming dollars some analysts believe the country could face its first-ever default.

The Central Bank of Sri Lanka (CBSL) raised the standing deposit facility rate and the standing lending facility rate by 50 basis points (bps) each to 5.50% and 6.50%, respectively.

A Reuters poll of 13 economists showed 6 out of the 7 economists who saw an increase had predicted a 50 bps rise in both the SDFR and SLFR, while the rest saw no change.

"The Monetary Board was of the view that the above measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability," the central bank said in a statement.

The CBSL had been the first central bank in Asia to tighten policy in the pandemic era by raising rates by 50 bps in August last year and then held rates steady in October and November.

Sri Lanka central bank to get $400mn swap line from India's RBI

"With this decision the central bank has shifted from being focused on growth to addressing inflation and external challenges as priorities," said Udeeshan Jonas, chief strategist at CAL Group.

"An increase in rates will help reduce money printing and control excess liquidity from flowing into increased consumption".

The CBSL has a mandate to keep inflation within a 4%-6% band, but the latest data showed inflation hit a 12-year high of 12.1% in December, up from 9.9% the previous month, on the back of rising commodity prices and domestic food supply shortages.

The CBSL revised down its projection for 2021 growth to 4%, from 5% previously, and said the recent uptick in inflation is expected to be transitory.

"The market was expecting a 100 bps hike, so we may see a knee-jerk reaction in the markets on the downside," said Abhijit Kukreja, senior vice president for EM equities at brokerage Auerbach Grayson.

"In any case, I don't think a rate hike of this magnitude makes a difference. Even with a 100 bps hike, there is a lack of demand for Sri Lanka bonds anyway at this point, due to lack of visibility in the pending payments in the second half of the year. The currency is also already managed."

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