Sri Lanka Latest to Cut Rates as Growth Slows Most in Two Years

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Sri Lanka’s central bank eased policy for the first time in 16 months to boost growth, joining more than 20 peers around the globe that have cut rates this year.

The standing lending facility rate was cut to 7.5 percent from 8 percent and standing deposit facility rate to 6 percent from 6.5 percent, the Central Bank of Sri Lanka said in a statement on its website Wednesday. All three economists in a Bloomberg survey had predicted no change.

“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 read. The “relaxed monetary policy stance will also be pursued in months to come” until market rates come down enough to boost growth, it read.

Sri Lanka’s economy expanded in the fourth quarter at the slowest pace since 2013, boosting pressure on policy makers to act before President Maithripala Sirisena is due to call parliamentary elections around June. Inflation is at the lowest level in data going back to 2009 as global oil prices plunged.

“Given inflation at record low levels and construction projects under review and not kicking off, the authorities would have wanted to give a further boost to consumption,” said Bimanee Meepagala, Colombo-based fund manager at NDB Wealth Management Ltd.

Sri Lanka’s benchmark stock index rose 0.1 percent as of 10 a.m. in Colombo, the biggest gain in a week, and the rupee was little changed at 133.01 a dollar.

Policy Outlook

Since taking power in January, Sirisena has suspended construction of a $1.4 billion Chinese-funded city to be built on reclaimed land as he looks to dilute China’s clout in the island nation. His administration is reviewing whether the Port City, Sri Lanka’s largest foreign-funded project, has received relevant approvals.

The monetary authority’s decision comes while Governor Arjuna Mahendran is on leave during an investigation into whether a family member benefited unduly from a bond auction. In his first interest-rate review after being appointed in January, Mahendran had said Sri Lanka’s policy is “veering toward the looser side.”

“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, wrote in a report. “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.”

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