Sri Lanka Central Bank Cuts Rates for Faster Economic Growth while Counterparts in India and Pakistan Raised Them

11th January 2011, www.bloomberg.com

Sri Lanka’s central bank cut a key interest rate for the third time in seven months to help spur economic expansion.

The Central Bank of Sri Lanka lowered the reverse repurchase rate by half a percentage point to 8.5 percent, adding to the cuts in July and August, according to a statement on the Colombo-based bank’s website today. It reduced the repurchase rate by a quarter of a percentage point to 7 percent.

Governor Ajith Nivard Cabraal said last week Sri Lanka is aiming to accelerate growth to 8.5 percent in 2011 and 9 percent in 2012 from an 8 percent expansion in 2010. He has room to keep borrowing costs low as the inflation reading in December was around half the average level in the past five years.

“Inflation has been contained so far and the central bank is not overly concerned about it yet,” Leif Eskesen, Singapore- based chief economist at HSBC Holdings Plc, said before the report. Still, “strong economic growth is expected to translate into more demand-led price pressures going ahead.”

Today’s move will also help cut capital inflows and check gains in the rupee, an issue that Cabraal said in a Nov. 16 interview is a concern for the central bank. Sri Lanka could cope with inflation, he said.

Rupee, Bonds

The Sri Lankan rupee, which has risen about 3.5 percent since the end of a 26-year civil war in May 2009, was little changes at 110.8 against the dollar at 9:14 a.m. in Colombo, according to Bloomberg data. The yield on the three-year bond maturing in March 2014 fell 30 basis points to 8.05 percent, according to the Commercial Bank of Ceylon Plc.

Consumer prices in the capital, Colombo, rose 6.9 percent last month from a year earlier, less than the average 11.6 percent in the five years through December 2010, as an expansion in farm cultivation after the end of the war boosted agriculture production.

“The favorable macroeconomic environment provides the required space and comfort for new and wider investments to be made in

all sectors of the economy, including new growth areas, without fueling undue inflationary pressures in the period ahead, thereby firmly supporting the country’s growth potential,” according to the central bank statement.

Sri Lanka plans to introduce inflation targeting in its monetary policy in order to keep consumer-price growth low for long periods, the central bank said on Nov. 22. It didn’t say what level of inflation it would be targeting.

Company Investments

Optimism about the Indian Ocean island nation’s growth prospects has encouraged investments from companies including Shangri-La Asia Ltd., helping make Sri Lanka’s benchmark All- Share Index the world’s second-best performer in 2010. The index rose 0.1 percent in early trading today.

Consumer and corporate credit grew 23 percent in November from a year earlier, more than double the level in July, the bank said today.

Sri Lanka plans to ease foreign investment rules in businesses including tourism and education to further support growth, Cabraal said last week.

Cabraal cut rates even as counterparts in India and Pakistan raised them in 2010, said Jan. 4 that the central bank will “respond appropriately” if excessive consumer demand stokes price gains.

India on Nov. 2 boosted rates for the sixth time in 2010 to rein in inflation. Pakistan increased its benchmark discount rate on Nov. 29 for the third time since late July.

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