Sri Lanka central bank resumes rate cuts to boost growth

By Uditha Jayasinghe and Swati Bhat

COLOMBO (Reuters) – Sri Lanka’s central bank reduced key its policy rates by 100 basis points on Thursday, as expected, doubling down on efforts to spur growth and finalise the first review of a $2.9 billion bailout package from the International Monetary Fund.

The Central Bank of Sri Lanka (CBSL) lowered the standing deposit facility rate and the standing lending facility rate to 10% and 11%, respectively, it said in a statement, to put the crisis-hit economy on a firmer growth footing.

“The Board arrived at this decision following a careful analysis of the current and expected developments,” the CBSL said in the statement.

The rate cut was in line with market expectations.

The central bank said the current benign prices outlook in the domestic economy would help stabilise inflation at 5% in the medium-term and enable the economy to reach its potential growth.

Sri Lanka’s economy was crushed last year under the worst financial crisis in over seven decades with inflation sky-rocketing and foreign exchange reserves falling to record lows, severely stunting the island nation’s ability to import essential commodities.

CBSL responded by hiking rates a total 10.5 percentage points to contain inflation and rebuild shore up its currency. Since June, however, CBSL has reduced rates by a total 550 bps as the economy stabilised following a $2.9 billion rescue package from the IMF in March.

The rate cut comes after the IMF failed to reach an agreement with Sri Lanka in its first review of the bailout package last month, due to a potential shortfall in government revenue.

That could delay the release of the second tranche of funds under the bailout.

CBSL reiterated that it would like to see market interest rates come down further.

It “will continue to closely monitor the developments in market lending interest rates and review the administrative measures appropriately,” it said in the statement.

(This story has been corrected to fix the percentage point figure in paragraph 7)

(Reporting by Uditha Jayasinghe and Swati Bhat; Editing by Sam Holmes and Sudipto Ganguly)