Sri Lanka Renews Policy Easing With Cut in Benchmark Rates

Anusha Ondaatjie
·2 min read

(Bloomberg) -- Sri Lanka’s central bank unexpectedly renewed its monetary easing cycle to support a rebound in the economy after inflation eased for the first time in five months.

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The Central Bank of Sri Lanka lowered the standing lending facility rate by 50 basis points to 9.50%. Most economists surveyed by Bloomberg forecast monetary policy to be left unchanged. The deposit facility rate was also cut by 50 basis points to 8.50%.

The monetary authority weighed subdued demand conditions, favorable near-term inflation dynamics and the absence of external sector pressures in deciding to cut the rates, according to a statement.

“A further easing of monetary policy would provide the required space for market interest rates, particularly lending rates, to adjust downwards further to levels conducive to continued expansion of credit to the private sector,” the central bank said.

Sri Lanka’s inflation eased for the first time in five months in February on the back of a stronger currency and slower gains in food prices.

The central bank “seems to be comfortable with inflation and the FX reserves position, and since the rupee is strong, there was the space to ease,” said Sanjeewa Fernando, senior vice president of research at Asia Securities Pvt Ltd in Colombo.

It also shows “they are really serious to support the economy and drive revenue in line with the International Monetary Fund program criteria,” he added.

The central bank said on Tuesday that it also was moving away from administrative measures, and going toward market-based instruments “as the economy normalises.” The monetary authority had decided to remove the remaining restrictions on the usage of the standing deposit facility from April 1, given the improvements in domestic money market activity and liquidity conditions.

Sri Lanka’s annual growth is expected to turn positive this year and Central Bank Governor Nandalal Weerasinghe has said the monetary policy stance will remain accommodative for the economy to reach its full potential.

The economy expanded for the second straight quarter in the three months to December, buoyed by an IMF bailout and cheaper borrowing costs.

Last week, the South Asian nation secured an initial nod for a $337 million payout from the IMF, while the government separately negotiates restructuring $12 billion in defaulted global bonds. President Ranil Wickremesinghe said earlier in March that the nation is seeking relief from payments through 2027.

--With assistance from Tomoko Sato, Shwetha Sunil and Niluksi Koswanage.

(Updates throughout)

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