Lanka central bank unexpectedly cuts rates

Central Bank of Sri Lanka unexpectedly cut interest rates by 50 basis points, aiming to spur growth amid its worst financial crisis in decades, according to Reuters.

The move, reduced the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) to 8.50 and 9.50 per cent, respectively.  ٍٍٍٍSurprised markets, with most economists expecting no change.

Governor P. Nandalal Weerasinghe stated further rate cuts could follow if inflation remains stable between 4-5 per cent.

Moreover, the central bank anticipates inflation to stay within this range for the next 12 to 18 months.

This latest cut, totaling 700 basis points since last year, reflects efforts to revive the economy after its largest crisis since independence.

The decision aims to bolster demand, taking advantage of recent tariff reductions and currency appreciation. Although the reduction aims to maintain inflation at the targeted 5 per cent level, it might not significantly impact credit due to low confidence and impending elections.

Sri Lanka faces discussions to restructure $12 billion in debt, defaulted in 2022, with negotiations ongoing ahead of IMF reviews.

Despite a 2.3 per cent economic contraction in 2023, growth rebounded to 4.5 per cent in the fourth quarter, setting the stage for further recovery this year.