Central Bank surprises markets

Sri Lanka’s central bank cut its key interest rates on Friday, in a surprise move to boost sluggish growth after the country’s tourism sector and investments plummeted following the deadly Easter Day bomb attacks by Islamist militants.

It reduced the standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) by 50 basis points to 7.00% and 8.00%, respectively. A Reuters poll had expected the bank to keep both rates steady.

The central bank cut rates by 50 basis points in May to support the economy after the April 21 attacks.

The latest cut comes ahead of a presidential election later this year.

Economic growth had already slowed to a 17-year low of 3.2% in 2018 and the central bank expects it to slow to 3% or less this year, while a Reuters poll has predicted growth will be its lowest in nearly two decades this year.

“Although economic growth is expected to recover gradually towards its potential in the medium term, domestic and global headwinds are likely to delay this recovery,” the central bank said in its monetary policy statement.

“Therefore, it is essential that the available policy spaces are utilised to support productive economic activity without disrupting the improvements achieved in relation to macroeconomic stability.”

The tourism sector, Sri Lanka’s third-largest source of foreign currency, was badly hit by the Easter Sunday bomb attacks by Islamist militants that killed more than 250 people.

“This might make market rates, which are already on the decline, come down faster,” said Danushka Samarasinghe, CEO at Softlogic Capital Markets.

“This will boost economic activity ahead of the election. However, the concern is this move will lead to foreign outflow and will weaken the rupee as a result.”

Pressure on the rupee has been building since early this month as foreign investors started to pull out their funds in line with outflows from other emerging markets.

The government’s finances remain under pressure with a heavy external debt repayment schedule between 2019 and 2022. (Nikkei)

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