Sri Lanka Raises Rate to Offset `Substantial' Cash Injection

(Bloomberg) -- Sri Lanka’s central bank unexpectedly raised benchmark interest rates, even as it paved the way for a “substantial amount” of cash injection in the banking system to correct a liquidity deficit.

Governor Indrajit Coomaraswamy increased the standing lending facility rate to 9 percent from 8.5 percent and raised the standing deposit facility rate to 8 percent from 7.25 percent with immediate effect, the Central Bank of Sri Lanka said in a statement in Colombo on Wednesday. That was done to “neutralize” the effect of a cut in the lenders’ reserve ratio to 6 percent from 7.5 percent effective Nov. 16, the bank said.

None of the seven economists in a Bloomberg survey predicted the rate move.

The “large and persistent liquidity deficit in the domestic money market requires policy intervention,” the central bank said while retaining its neutral stance. The reserve ratio cut will reduce the cost of funds for banks that were facing tight money conditions, according to the statement.

The decisions are expected to help revive funding to the private sector and support economic growth. Sri Lanka’s gross domestic product is seen growing 3.8 percent in 2018 and 4.3 percent in 2019, according to a Bloomberg News survey.

The central bank also flagged the need for structural reforms to sustain growth instead of relying on short-term monetary and fiscal stimulus. That call comes amid a political crisis in the island nation.

The Supreme Court Tuesday suspended an order by President Maithripala Sirisena to dissolve the parliament and call a snap general election after Ranil Wickremesinghe mounted a legal challenge against his ouster as prime minister.

Wednesday’s rate decision is expected to have a neutral effect on the market, the central bank said, adding that the adjustments are expected to narrow the spread between deposit and lending rates.

--With assistance from Manish Modi.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram, Karl Lester M. Yap

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