Sri Lanka’s central bank unexpectedly cut its key lending rates by 25 basis points on Wednesday, as policy makers sought to revitalise an economy battling weak growth and political uncertainty.
The move comes as investors worry about political instability in the country after the ruling coalition lost a local government election in February, and communal clashes earlier last month in the central highlands following attacks on Muslims by nationalist Sinhalese crowds.,
Citing favourable inflation and lacklustre growth, the central bank cut the standing lending facility rate (SLFR) by 25 basis points to 8.50 percent and maintained the standing deposit facility rate (SDFR) at 7.25 percent. The market, however, had widely expected both rates to be kept steady.
The economy grew 3.1 percent in 2017, the slowest since a recession in 2001 and well below the 4.5 percent pace of 2016.
“This decision is also expected to dampen the volatility observed in interest rates in the domestic market during the recent past,” the central bank said in a statement.
“While the Central Bank’s monetary policy easing measure is expected to address the near term tepid growth prospects, it is essential that the planned structural reforms are carried out without delay for the economy to move towards a sustained high growth path in the medium term.”
Wednesday’s rate cut also comes ahead of a no confidence motion by the opposition against Prime Minister Ranil Wickremesinghe due later on Wednesday, accusing him of failing to address an alleged bond scam involved the former central bank chief.
Since the February election setback for the unity government, the central bank governor has warned of risk to growth from political instability.
The central bank has tightened monetary policy four times since December 2015 through March last year to fend off pressure on the fragile rupee and curb stubbornly high credit growth that stoked inflation.
The rupee hit record high last month as investors worried about policy paralysis in the wake of the election results and the renewed communal violence. It slipped to a record-low of 156.20 on March 16.
The previous rate increases along with tight fiscal measures to meet conditions by the International Monetary Fund (IMF) for a $1.5 billion loan have dragged on the economy.
Analysts expect a new revenue measure implemented from this month could further dent economic growth this year unless the central bank reduces policy rates.
Last month, the IMF urged the central bank to remain focused on price stability as its primary objective and stand ready to tighten if signs of demand-side inflation pressures or accelerating credit growth re-surface. (Reuters)