Sri Lanka Policy Interest Rate Down to 6 Year Low to Revive Economy Following Slowing Inflation

20th August 2010, www.bloomberg.com

Sri Lanka’s central bank unexpectedly cut a benchmark interest rate to the lowest level in almost six years, taking advantage of slowing inflation to boost economic growth.

The Central Bank of Sri Lanka lowered the reverse repurchase rate by half a percentage point to 9 percent, the lowest level since November 2004, and kept the repurchase rate at 7.25 percent, according to a statement on the Colombo-based bank’s website today. All four economists surveyed by Bloomberg News had expected no change.

Sri Lanka’s inflation slowed in July for a fifth straight month on increased farm supplies, as land recovered from Tamil Tiger rebels after the end of the island’s civil war helped expand cultivation. The central bank said today it expects domestic credit conditions to ease, supporting a revival in economic growth.

“There is no danger to inflation with the rate cut,” said Sarath Rajapakse, director of research at Capital Trust Securities Pvt. in Colombo. “One of the biggest obstacles to growth had been high commercial bank lending rates.”

Consumer prices in the capital, Colombo, climbed 4.3 percent in July from a year earlier after gaining 4.8 percent in June.

Inflation in Sri Lanka has slowed to less than half the average rate of the five years through 2009.

Regional Moves

Sri Lanka’s move contrasts with those in other Asian central banks including India, Malaysia and Thailand, which raised borrowing costs this year to tame rising prices and prevent asset bubbles.

Governor Ajith Nivard Cabraal said earlier this month the central bank would gauge the impact of last month’s quarter- point interest-rate cuts before making its next move.

“While inflationary pressures in the domestic economy have continued to be benign in the recent months, enhanced prospects for domestic agricultural produce have further improved the outlook for inflation,” the bank said today.

The yield on the four-year government bond fell 5 basis points to 8.95 percent at 8:45 a.m. in Colombo, according to Standard Chartered Plc. The Sri Lankan rupee, which has gained about 2.4 percent since the civil war ended in May 2009, was little changed at 112.35 per dollar.

European Concessions

Rajapakse said low funding costs will also help boost consumer demand after the European Union withdrew concessions for Sri Lankan exports this year, saying the country failed to respond to European demands to improve human rights.

Sri Lankan exports, which make up about a fifth of the island’s $42 billion economy, gained 15.1 percent to $620 million in May, after advancing 24.2 percent in April.

President Mahinda Rajapaksa’s government is aiming to accelerate growth to 7 percent in 2010, the fastest pace since 2006, after ending a 26-year civil war by defeating the Liberation Tigers of Tamil Eelam rebels in May 2009.

Prospects of peace and faster growth are attracting overseas investment.

Emirates Telecommunications Corp., the United Arab Emirates’ biggest phone company, on July 20 announced plans to spend as much as $163 million in six months to expand its network in Sri Lanka. Minor International Pcl, Thailand’s biggest hotel

operator, has bought a controlling stake in a resort off Sri Lanka’s southern coast, amid growing leisure and business travel in the island.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.