Sri Lanka Lowers Key Interest Rates to Spur Economic Growth

Sri Lanka cut interest rates more than economists estimated to spur growth, joining nations from Australia to India in easing monetary policy.

The Central Bank of Sri Lanka cut the reverse repurchase rate to 9 percent from 9.5 percent and the repurchase rate to 7 percent from 7.5 percent, it said in a statement in Colombo today. Five of 11 economists in a Bloomberg survey predicted a quarter percentage-point reduction in both benchmarks, with the rest forecasting no change.

Governor Ajith Nivard Cabraal is seeking growth of 7.5 percent this year after expansion cooled to 6.4 percent in 2012 as demand fell for the island’s exports ranging from tea to textiles. The central bank cut rates today even as the International Monetary Fund said yesterday further stimulus should be on hold as inflation remains elevated.

“They went for a more aggressive cut to help stimulate domestic demand,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers in Colombo. “The central bank will have to keep monitoring the external front to ensure the export decline isn’t too sharp,” he said, adding that the monetary authority may be able to keep inflation at the “single-digit level.”

The rupee slipped 0.2 percent to 126.10 against the dollar at 10:42 a.m. in Colombo. It has gained 1.3 percent this year. The Colombo All-Share Index rose 0.5 percent. The yield on the five-year bond maturing in April 2018 slipped 20 basis points, according to Commercial Bank of Ceylon Plc.

Strong Signal

President Mahinda Rajapaksa’s government has pledged to spend $1 billion annually for at least three years from 2010 on infrastructure projects to spur growth. The central bank cut interest rates in December after raising borrowing costs in February and April last year and letting the rupee weaken to tackle a trade deficit that depleted foreign exchange reserves.

“We made a fairly steep cut this time because we think that would give a very strong signal,” Cabraal said today in a Bloomberg TV interview with John Dawson. “That will also make the overall conditions rather stable, so that people will not be looking at new rate cuts in the near future.”

The central bank also increased the reserve maintenance period of commercial banks to two weeks from one week with effect from June 1, to “offer greater flexibility” in managing their liquidity, it said in a statement. The statutory reserve ratio for lenders was maintained at 8 percent.

Policy makers around the world have moved to counter currency gains and stimulate growth, with Vietnam cutting rates today and the Bank of Korea unexpectedly reducing interest rates yesterday, following the lead of Australia, Europe and India.

Sri Lanka’s exports have fallen for 13 months through March. Consumer prices rose 6.4 percent in April from a year earlier, among the highest in Asia.

“With inflation elevated and growth slowing, monetary policy is facing a challenging task,” the International Monetary Fund said in a statement yesterday. “Further stimulus should be on hold until inflation pressures decline” and rapid credit expansion in recent years justifies heightened vigilance.

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