COLOMBO: Sri Lanka’s central bank has raised benchmark interest rates for the first time in nearly four years by 50 basis points ahead of a possible IMF bailout.

The Central Bank of Sri Lanka raised its lending rate from 7.5 to 8.0 percent, saying that relatively cheap money had the potential to fuel demand-driven inflation that could undermine the fragile economy.

The previous rate increase was in April 2012 when it was increased by 75 basis points to 9.75 percent

Even before Friday’s rate increase, commercial banks had been increasing their lending rates by as much as two percentage points, anticipating a move by the central bank to tighten monetary policy to curb inflation.

“The monetary board (of the central bank) observed that, in spite of the recent policy measures... and some upward adjustments observed in market interest rates, certain risks to macroeconomic stability continue,” bank said in its monthly review of the economy.

The bank said year-on-year inflation climbed to a staggering 4.6 percent in January, up from 0.8 percent in 2015.

The rate hike came as Sri Lanka made a formal request for an IMF bailout package to aid its struggling economy after a sharp slowdown in growth and a widening budget deficit. Details of any bailout are yet to be finalized.