Sri Lanka’s central bank sees no need for further interest rate increases this year, according to Governor P. Nandalal Weerasinghe. The central bank surprised markets with a 100 basis-point hike in May to contain inflation fueled by the Iran war.

Inflation Expectations

Weerasinghe said the May hike was a proactive move taken because the central bank expected inflation to rise to 7%, and current inflation was broadly on expected lines. The key inflation index climbed to 7.3% in July, marking the biggest rate of increase in three years, driven by rising energy prices.

The governor aims to boost the central bank’s gross foreign exchange reserves to about $8 billion by the end of the year from roughly $6.6 billion now. Weerasinghe said the full impact of the May rate increase would take 12 to 18 months to work through the economy and that inflation was likely to return to the central bank’s 5% target in the first half of next year.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.