ECONOMYNEXT - Sri Lanka's central bank raised policy rates by 50 basis points taking the rate corridor to 6.50 percent and 8.0 percent, trailing behind banks which had already raised deposit rates by a bigger margin.
"…[I]n spite of the recent policy measures taken by the Central Bank and some upward adjustments observed in market interest rates, certain risks to macroeconomic stability continue," the monetary authority said in a February policy statement.
"In particular, the Monetary Board was of the view that the excessive growth of broad money fuelled by domestic credit expansion in the midst of continued upward trend in underlying inflation requires pre-emptive policy measures in order to contain further build- up of demand driven inflationary pressures."
The policy rate hike came after the banks on their own raised deposit rate by around 200 basis points over the past six months, bringing a much needed correction to the credit system.
The central bank said broad money (defined as M2b) continued grew 17.8 percent in the year t December 2015 compared to 13.4 percent in 2014.
In 2015 commercial banks had given 691.4 billion dollars in credit (up 25.1 percent), up from 223.9 billion rupees in (up 8.8 percent) in 2014
In December the central bank raised the reserve ratio by 150 basis points, which economists said would make the banking sector more inefficient and will not solve the problem of low interest rates and money printing.
Sri Lanka's central bank has a history of printing money and delaying rate hikes and generating economic instability.
Critics have said that it either prints money and depreciates the currency steadily generating high inflation (in the 1980s and early 1990) or prints money and defends the currency generating balance of payments trouble or both and then runs to the International Monetary Fund.
The reverse repo rate at which money is injected to the banking system is now at 8.0 percent, the same level it was in April 2015, when rates were cut despite and expanding budget deficit and private credit that was turning sharply positive.