Growth in private-sector credit demand is accelerating, and prices for imported commodities are rising. The risk of inflation taking off looks high, yet the Central Bank of Sri Lanka (CBSL) continued to cut benchmark interest rates until January 2011. These cuts will have to be reversed this year, and if inflation reaches double digits the CBSL may also restrict the liquidity available to banks. In 2012-14 rising confidence among investors and the gradual narrowing of the fiscal deficit should support a reduction in interest rates. This trend will be supported by the more efficient functioning of financial markets, along with greater competition and a deepening of capital markets. However, if the budget deficit were to widen unexpectedly, interest rates could increase again. Another concern is that the authorities have shown a growing tendency to pressurise banks (notably the dominant state-owned banks) to reduce interest rates for political purposes. If this policy is maintained, it could have a distorting effect on Sri Lanka's credit markets and might undermine efforts to control money supply growth.