Sri Lanka Reduces Key Rate for Fifth Time to Aid Economy

Sri Lanka’s central bank lowered borrowing costs for a fifth time this year to support the economy amid the coronavirus crisis.

The Central Bank of Sri Lanka cut the standing lending facility rate by 100 basis points to 5.5%, according to a statement. Two of the five economists surveyed by Bloomberg predicted the move, while all expected a cut.

Sri Lanka Reduces Key Rate for Fifth Time to Aid Economy

Key Insights

  • The monetary authority also reduced the standing deposit facility rate by 100 basis points to 4.5%
  • “The spread of the Covid-19 pandemic has significantly impacted near term growth prospects globally, while available indicators for Sri Lanka also suggest that economic growth is likely to have been severely affected during the second quarter of 2020,” the central bank said
  • The Asian Development Bank expects the economy to contract 6.1% from a year earlier, compared with its previous forecast for a 2.2% expansion
  • The central bank sees the latest cut in policy rate “inducing a further reduction in market lending rates,” and encouraging the financial system to aggressively enhance credit to productive sectors of the economy
  • Inflation in June slowed for a fourth straight month, dipping below the central bank’s 4%-6% target range as measures to contain the virus’s spread sapped demand. A lockdown imposed since mid-March was lifted last month

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  • Last month, the monetary authority cut the statutory reserve ratio -- the portion of deposits that banks need to park with it -- by 200 basis points to 2% to boost liquidity available for lending in the economy amid the pandemic. The SRR was kept unchanged Thursday
  • Sri Lanka’s central bank had earlier offered cheap funds to banks and a refinance program that provides a combined 150 billion rupees to businesses affected by the virus outbreak
  • To read the full statement of the central bank, click here

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