Sri Lanka Unexpectedly Cuts Rates as U.S. Default Deadline Nears

Sri Lanka unexpectedly cut interest rates to protect economic growth from the risk of a U.S. default, as time runs short for Congress to agree on raising the debt ceiling to pay back the world’s benchmark bonds.

The Central Bank of Sri Lanka cut the reverse repurchase rate to 8.5 percent from 9 percent and the repurchase rate to 6.5 percent from 7 percent, it said in a statement today. Most analysts surveyed by Bloomberg News expected no change. The reductions were the first since May this year.

“We felt that the max space available should be given to the economy,” Governor Ajith Nivard Cabraal said in a Bloomberg Television interview today. “The looming debt crisis and basically the fact that there has been no agreement, which is very, very difficult for us to understand, is going to be something we will really fret about in the next few months.”

Senate Democratic and Republican leaders said yesterday they made significant progress toward an accord to end a partial U.S. government shutdown and prevent the nation from running out of borrowing authority on Oct. 17, which would raise the risk of missed debt payments. Lower rates should help Sri Lankan expansion from the start of 2014, even as the impasse in the U.S. weighs on the global economy, Cabraal said.

“The global scenario would partly have played a role in the bigger-than-expected cut,” said Sanjeewa Fernando, an economist at CT Smith Stockbrokers Pvt. in Colombo. “With global demand expected to be subdued, the rate cut will be a stimulus to exporters through lower borrowing costs and a more favorable exchange rate.”

Policy Signal

The yield on the Sri Lankan government bond maturing in April 2018 slid about 20 basis points, or 0.2 percentage point, to 11.1 percent after being mostly unchanged last week, according to prices from Hatton National Bank Plc. The rupee was little changed at 130.9 per dollar as of 10 a.m. in Colombo. The Colombo All-Share Index fell 0.1 percent.

Cabraal said he’s comfortable with Sri Lanka’s inflation outlook, adding that the central bank is “very likely” done with interest-rate actions for the rest of this year.

Eight of nine economists in a Bloomberg survey predicted no change in the repurchase rate today, with one expecting a cut of a quarter of a percentage point. Seven of nine economists in another survey predicted no change in the reverse repurchase rate, with two calling for a 25 basis-point cut.

Economic growth will be close to 7.5 percent in 2013, Cabraal said. Consumer prices rose 6.2 percent in September from a year earlier.

The emerging agreement in the U.S. would suspend the debt limit through Feb. 7, 2014, fund the government through Jan. 15 and require a House-Senate budget conference by Dec. 13, according to a Senate source familiar with the talks, who spoke on condition of anonymity to discuss them.

“Even if the U.S. were to get their act together and get past the debt ceiling, I think the fact that the global economy has been put under so much stress, is something that many policy makers would not forget,” Cabraal said. That’s going to lead to “various changes in the way central banks will perceive the safety and quality of investments,” he said.

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