Sri Lanka rates rise unexpectedly

Rising prices have triggered protests in Sri Lanka this year

Sri Lanka's central bank has raised interest rates by half a percentage point, taking investors by surprise.

The bank put up its key overnight repurchase rate to 7.5% after the financial markets closed on Wednesday.

It said the rise was needed "to curb the build-up of inflationary pressure and inflationary expectations."

The move, the first change in interest rates in over a year, came a full week before the central bank's next official rate-setting meeting.

It also went against the market consensus that the bank would not raise borrowing costs until January.

Up again

Analysts said Wednesday's rate increase was unlikely to be the last.

"It is a very rational decision, but (half a percentage point) is not sufficient. They may raise it again by (a full percentage point) in the first quarter of next year," said Vajira Premawardhana at Lanka Orix Securities.

The latest rate rise partially reverses cuts last year aimed at kick-starting Sri Lanka's economy after two decades of civil war.

The most recent change in rates came in October 2003, when the central bank lowered its repurchase rate by half a percentage point.

But inflation has risen sharply in recent months, fuelled in part by soaring oil prices.

Sri Lanka's inflation rose to 6.1% last month, up from 5.4% in September, according to the latest official figures.

The rising cost of living has triggered protests in the capital, Colombo, this year.