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IMF concerned as Sri Lanka cuts interest rates

Sri Lanka’s Central Bank has decided to cut the reverse repurchase rate to 9 percent from 9.5 percent and the repurchase rate to 7 percent from 7.5 percent, a bigger reduction than expected by analysts.

"[T]here is now a need to stimulate the domestic economy, particularly in the light of the gradual moderation in headline inflation and subdued demand pressures in the economy," the Central Bank said in its May monetary policy review.

Economic growth slowed from 8.2% in 2011 to 6.4% in 2012, after a fall in demand for Sri Lankan exports, including tea and textiles, but the treasury has bizarrely forecast growth of 7.5% for this year.

Sri Lanka: why the unexpected cut? - Financial Times (10 May 2013)

The International Monetary Fund yesterday warned Sri Lanka against further easing of monetary policies.

“With inflation elevated and growth slowing, monetary policy is facing a challenging task,” the International Monetary Fund said in a statement.

“Further stimulus should be on hold until inflation pressures decline.”

The governor of the Central Bank Ajith Cabraal said there wouldn’t be any further cuts for a while, but also suggested that the cuts were due to internal issues rather than international conditions.

“We made a fairly steep cut this time because we think that would give a very strong signal,” Cabraal said to Bloomberg.

“That will also make the overall conditions rather stable, so that people will not be looking at new rate cuts in the near future.”

“We have seen a slight slowdown in our economy, which has been rather disconcerting, and we believe some impetus and some kind of support needs to be given to economy to kick start it once again,” he said.

Sanjeewa Fernando, head of research at brokerage C T Smith in Colombo, told the Financial Times that the move comes in anticipation of further bad news.

“I think they are not happy with the first quarter GDP numbers, which they already have access to as policymakers, even though they are not out for the rest of us yet,”

“There have been massive drops exports and imports recently, and so the next quarter could even be below 6 per cent,

“It seems once you’ve slammed on the brakes, it’s not so easy to get things going again.”

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