Sri Lanka’s central bank cut one key interest rate while holding another after inflation eased to the lowest level in about two years, ignoring advice from the International Monetary Fund to hold off on further easing.
The Central Bank of Sri Lanka reduced the benchmark reverse repurchase rate, which it renamed the standing lending facility rate, by 50 basis points to 8 percent, Governor Ajith Nivard Cabraal said in an interview in Colombo on Dec. 31. It held the repurchase rate -- now known as the standing deposit facility rate -- at 6.5 percent to signal to commercial banks that lending rates alone need to fall, he said.
The rate cut comes a month after the IMF advised the South Asian nation of 20 million people to allow time for earlier reductions to take effect before mulling further easing. Cabraal in October unexpectedly cut both key interest rates by 50 basis points to guard against the risk of a default amid a government shutdown in the U.S., its largest export market.
“Previous easing decisions that we have taken have not created any sort of tension in our economy,” Cabraal said in an interview with Bloomberg Television today. “So we are quite satisfied that the steps we are taking are the right ones, and I’m sure over time the IMF also would recognize that those were the right decisions at the time.”
The island’s $59 billion economy, roughly the size of the U.S. state of Delaware, expanded at least 7.2 percent in 2013, compared with 6.4 percent a year earlier, Cabraal said. Gross domestic product growth will accelerate to 7.8 percent this year, and average 8.3 percent over the next three years, he said.
Consumer prices rose 4.7 percent in December from a year earlier, the slowest pace since February 2012. They will probably climb about 5 percent this year before easing to about 4 percent in subsequent years, he said.
“We see the time as right with inflation under control, the rupee at a stable level and growth trajectory on course,” Cabraal said in the earlier interview. “We think demand-driven inflation pressure is well contained and inflation expectations are at the right level.”
Cabraal said that while the Sri Lankan rupee is on an appreciating trend, the monetary authority will monitor the currency’s movement cautiously and ensure volatility is minimized.
The Sri Lankan rupee, which slipped 2.4 percent in 2013, was little changed at 130.72 per dollar at 9:34 a.m. local time. The Colombo All-Share Index, which was closed yesterday, gained 4.8 percent last year.
The IMF last month said rate cuts had been slow to impact bank lending and called for the central bank to allow more time before considering further easing. The average prime lending rate for Sri Lanka’s commercial banks was 9.88 percent in the week ending Dec. 27, up from 9.68 percent a week earlier, according to the central bank.
“The International Monetary Fund may be to some extent guided by only the world events,” Cabraal said today.
Overseas sales of goods such as textile and tea showed signs of rebounding as developed nations see improvements in their economies, Cabraal said. U.S. consumer confidence is at a four-month high and euro-area factory output grew at a faster pace than economists forecast in December.
Sri Lanka will probably see minimal impact from the U.S. Federal Reserve’s move to reduce stimulus, Cabraal said.
“We don’t really need to worry too much about the tapering, because if the tapering is done, that suggests that the U.S. economy is doing well,” he said on Bloomberg Television today. “That augurs well for the entire world economy.”