The Central Bank of Sri Lanka has cut policy interest rates by 0.5% for the first time in over a year, in order to boost growth in the country.
The bank said in a statement its monetary board had decided to cut the standing lending facility rate to 7.5% from 8% and the standing deposit facility rate to 6% from 6.5%.
“Current behavior of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year,” the statement said. The “relaxed monetary policy stance will also be pursued in months to come” until market rates come down enough to boost growth, it further said.
The Central Bank said in the statement that inflation is projected to remain at “low mid-single digit level” in 2015.
“Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behaviour of market interest rates consistent with economic growth outlook. If any of subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine-tune such effects towards achievement of current objectives of the monetary policy,” the statement said.
Economic growth slowed in Sri Lanka to the slowest since 2013, increasing pressure on policy makers to act before President Maithripala Sirisena calls parliamentary elections after June.
“The central bank does appear to be in a state of flux that increases the uncertainty in predicting its next move,” Krystal Tan, a Singapore-based economist at Capital Economics, said according to Bloomberg.
“And there is also a risk that capital outflows, triggered either by parliamentary elections later this year or rate hikes by the U.S. Fed will force the CBSL to reverse course.”
Sri Lanka’s shares rose to a 3-week high on the news, rising by over 1%.
"We see the market will move up with this rate cut and some kind of political stability with the national government even after the parliamentary elections," said Danushka Samarasinghe, research head at Softlogic Stockbrokers (Pvt) Ltd, to Reuters.
Over the last month, Sri Lanka’s stock index lost 6.6%, its biggest drop since October 2012.