Sri Lanka cuts interest rates to boost growth while waiting for IMF review

COLOMBO (Reuters): Sri Lanka’s central bank lowered interest rates on Friday in an unexpected move to boost growth, while projecting inflation would remain subdued over the medium term.

Helped by its bailout by the International Monetary Fund, the South Asian island nation is recovering from its worst financial crisis in seven decades and awaiting the finalisation of its first review from the global lender.

The Central Bank of Sri Lanka (CBSL) lowered key rates by 100 basis points (bps), reducing the standing deposit facility rate and the standing lending facility rate to 9% and 10%, respectively, and taking total rate cuts to 650 bps since the current easing cycle began in June.

CBSL had raised rates by a record 10.50 percentage points to bring down sky-high inflation between April 2022 and March this year.

The board arrived at the decision, “with the aim of achieving and maintaining inflation at the targeted level of 5% over the medium term, while enabling the economy to reach and stabilise at the potential level,” it said in a statement.

With this reduction, further easing will be paused in the near term, it added, given that space exists for market interest rates to adjust downwards and reiterated the need for that to happen to ease domestic monetary conditions further.

“This rate cut is independent of an IMF decision on the first review. Growth is below expectation. So to stimulate growth they are front-loading the policy rate cut,” Udeeshan Jonas, chief strategist at equity research firm CAL.

The CBSL has forecast Sri Lanka’s economy will shrink 2% this year after a 7.8% contraction in 2022 when it went into a tailspin because of a severe foreign exchange shortage. The World Bank, however, has predicted a 3.8% contraction in 2023.