COLOMBO, Dec 15: Sri Lanka's Central Bank on Friday unexpectedly raised its benchmark short-term interest rates by 0.375 per cent in a bid to tame inflation amidst rising defence expenditure.

The bank said its reverse repurchase rate, used to manage liquidity and contain inflation, will rise to 10 per cent.

The short-term repurchase rate at which it lends to commercial banks goes up by the same amount to 11.50 per cent, the bank said following a monetary policy meeting late on Thursday.

Rising inflation has widened the negative real gap between interest rates and inflation, and the bank says high consumer prices are due to passing on of higher fuel costs to the users.

The Colombo Consumer Price Index (CCPI), the country's main measure of inflation, hit a 10-year high of 19.8 per cent in November, up from 17.2 per cent in October.

“Government recurrent expenditure has increased above the budgetary targets, necessitating increased bank borrowings,” the statement said.

Last month, Sri Lanka increased its defence budget for 2007 by 45 per cent to 139 billion rupees ($1.28 billion), straining government finances.Sri Lanka is set to record 7.4 per cent economic growth this year, compared to 6 per cent in 2005, the best in nearly three decades, despite a surge in ethnic fighting, the government said on Wednesday.

Despite a February 2002 truce, over 3,500 people have been killed since fighting between government forces and Tamil Tiger rebels intensified last December. —APP