Sri Lanka inflation bigger threat to business than interest rates: CB Governor

ECONOMYNEXT – Steeply rising prices is a bigger threat to businesses than high interest rates which will have to be maintained for a time until inflation start to ease, Central Bank Governor Nandalal Weerasinghe said.

Sri Lanka was now experiencing the result of past money printing and if rates are cut now, runaway inflation could be the result, he said.

“Higher interest rates is a cost to business, but inflation drives up all costs,” Governor Weerasinghe explained in Sinhalese, addressing concerns of businesses.

“Interest rates are raised by a central bank as an independent decision taking into account economic conditions and inflation.

“In a business interest may be 4 to 5 percent of total costs. May even 7 to 8 percent. But 95 percent of the cost is raw materials, transport and salaries. They are going up due to inflation.

“If a small business think that if we cut the current interest rates by half, then the 5 percent of costs can become half. But the rest of the 95 percent of costs can double.

“If we cut rates, inflation can become 100 percent. Then salaries will have to be raised, raw materials will go up, the exchange rate can depreciate.

“By controlling inflation we are helping businesses. By controlling inflation we will control 95 percent of the costs of business. The main thing for manufacturers is to control inflation.”

Sri Lanka rupee fell from 200 to 360 to the US dollar in 2022 after two years of money printing to suppress rates and inflation has hit close to 70 percent by September. The central bank’s policy rate is 15.5 percent but market rates are around 25 to 30 percent.

“Interest rates were kept down for a time,” Governor Weerasinghe said. “In the recent past enough money was printed. We are seeing the result of that.”

“It the rates are kept low then in the future the same results will be repeated. There can be runway inflation.”

When rates are raised credit slows and economic activity slows. However the inflation also takes away purchasing power and if left unaddressed can turn into hyper inflation and even bigger collapse.

This year the economy is expected to contract around 8 percent of gross domestic product as investment and consumption falls as efforts are made to stabilize the economy compounded by lack of capital inflows due to weak confidence and banks also repay foreign credits.