The Sri Lankan central bank's surprise move to raise interest rates, the first change in more than a year, is likely to be followed by another tightening early next year aimed at calming inflation, analysts said on Thursday. The central bank raised both its overnight repurchase and reverse repurchase rates by half a percentage point to 7.5 percent and 9.0 percent, respectively.
The bank announced the move after the market close on Wednesday, taking analysts by surprise because the bank had not been due to hold its monthly policy meeting until Friday.
In addition, analysts had expected rates to stay on hold this month.
However, the central bank said in a statement "the acceleration in the monetary aggregates so far in the year indicates the possibility of the onset of demand-fuelled pressure on inflation.
"The central bank is of the view that a tightening of monetary policy is therefore required to curb the build up of inflationary pressure and inflationary expectations in the economy." Sri Lanka's stock and foreign exchange markets were closed on Thursday to mark the Hindu festival of Deepavali and resume trading on Friday.
A Reuters survey between November 4-8 of six analysts had forecast the central bank would keep rates unchanged until the end of the year, but raise them by 25-50 basis points in January.
On Thursday, analysts said they expected rates to increase by a further 50 to 100 basis points in the first quarter of 2005 to control inflation, partly fuelled by high international oil prices.
"I was surprised by the rise because although it was long overdue I thought the bank's strategy was to subscribe for treasury-bills to pump money into the system," said Vajira Premawardhana, executive director of Lanka Orix Securities.