Sri Lanka Cuts Key Rate to Spur Growth After Terror Attacks

(Bloomberg) -- Sri Lanka’s central bank cut its benchmark interest rate for the first time in more than a year to support the economy after the Easter Sunday terror attacks clouded the growth outlook.

Governor Indrajit Coomaraswamy lowered the standing lending facility rate to 8.5% from 9%, the Central Bank of Sri Lanka said in a statement in Colombo on Friday. Six of the seven economists surveyed by Bloomberg predicted a cut, ranging from 25 basis points to 50 basis points.

• Standing deposit facility rate lowered to 7.5% from 8%
• The statutory reserve ratio was kept at 5%

Key Insights

• Inflation at 4.5% in April was well within the central bank’s “desired” 4% to 6% range for 2019, giving room to policy makers to lower rates. The easing will help fuel economic growth, which slowed to 1.8% in the fourth quarter, the weakest pace since the start of 2014
• Growth is expected to further take a knock after deadly terror attacks in April hit tourism, which accounts for 5% of the $87 billion economy
• The decision follows a “careful analysis of current and expected developments in the domestic economic and the financial market as well the global economy,” the central bank said in the statement. The broad aim is to stabilize inflation at mid-single digit level and allow the economy to reach its potential, it added
• The island nation won a crucial loan extension from the International Monetary Fund this month, giving the government more time to anchor macroeconomic stability and see through economic reforms
• Governor Coomaraswamy said in an interview earlier this month the central bank will consider all easing options to support the economy

What Economists Say

• Amanda Lokugamage, analyst at First Capital Research in Colombo, said in a note before the decision that policy intervention was inevitable to revive the overly sluggish economy and credit growth

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• Central bank sees higher pace of economic growth in the first quarter of 2019, compared with modest growth in 2018
• To read the full statement of the central bank, click here

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