With the rate increase, the Central Bank of Gambia leapfrogs Belarus to have the world's second highest policy rate after Malawi's rate of 22.50 percent.
Last year the central bank raised its policy rate by 800 basis points in response to currency depreciation and accelerating inflation but so far this year the bank's monetary policy committee had maintained rates at its previous meetings in January and May.
Gambia's headline inflation rate eased to 5.40 percent in June from 5.8 percent in June 2013, with food decelerating to 6.2 percent from 6.8 percent in June last year and non-food inflation to 4.4 percent from 4.6 percent. However, core inflation, which excludes the prices volatile food and energy, accelerated to 5.5 percent in June from 3.8 percent a year earlier.
"Readings of the latest private sector business sentiment survey indicate heightened inflationary expectations which could affect the price behavior of agents in the economy," the bank said.
In January the central bank forecast that inflation would ease to within its target of 5.0 percent by the end of this year, but acknowledged that its outlook was subject to several upside risks, including higher than expected oil prices and exchange rate pressures.
Gambia's dalasi has been depreciating since mid-2011 when it was trading around 26 to the U.S. dollar and its decline accelerated in the second half of last year.
Today the dalasi was quoted at 40.1 to the dollar, down 4.9 percent this year. In the 12 months to end-June, the central bank said the dalasi had depreciated by 19.4 percent against the dollar, 20.8 percent against the euro and 30.5 percent against pound sterling.
At the end of June, Gambia's gross international reserves declined to $163.5 million, equivalent to 4 months of imports, down from $176.06 million a year ago. The volume of trading in the foreign exchange market fell by 10.7 percent to $1.33 billion in the year to end-July from the same period last year.
Since the bank's previous policy meeting in May, the growth outlook for the country's economy had moderated due to uncertainty of agricultural production from the prospect of inadequate rainfall.
The 2014 forecast for Gambia's Gross Domestic Product is 5.3 percent, slightly down from 5.6 percent in 2013 and the central bank's previous forecast of 6.0 to 6.5 percent.