By Uditha Jayasinghe and Swati Bhat
COLOMBO (Reuters) – Sri Lanka’s central bank cut key interest rate by 73 basis points on Thursday With inflation easing, it suggested the South Asian nation was emerging from a devastating financial crisis and poised for a growth rebound.
The Central Bank of Sri Lanka (CBSL) cut its Standing Deposit Facility Rate and Standing Lending Facility Rate to % and 13%, respectively from 15 . 5% and 15.5% before.
Most analysts had expected the bank to keep rates steady. Interest rates are now at their lowest level since March 2022 when the crisis began.
The central bank said, “Given the accelerated deceleration of inflation, the benign inflation outlook and the easing of balance of payments pressure, the policy rate was cut, thereby strengthening the economic rebound”.
“Rate cut expected Normalization of the interest rate structure, broad-based economic activity and easing of financial market stress will help guide the economy towards a rebound phase.”
Sri Lanka’s main Colombo consumer price index from 73 rose 25 .2% .3%, taking some pressure off a crisis-hit economy that was hit by its weakest reading in seven years. A severe financial crisis caused inflation to soar and collapse.
The index peaked 73. It soared 8% year-on-year in September last year. The national inflation rate was 25.6% in
April, up from 250 Start to ease.7% in September.
The IMF has set the inflation target for Sri Lanka at 16 ).2%, but the CBSL is eyeing a more ambitious single-digit inflation target by September.
“Headline inflation is expected to reach single-digit levels early in the third quarter – 250 and stabilize around mid-single-digit levels over the medium term, The bank said.
Thirteen of 15 analysts and economists polled by Reuters expect the central bank to keep its benchmark interest rate unchanged in its fourth announcement of a policy rate this year.
The central bank raised interest rates by a record 250 basis points last year to curb inflation and passed 100 Basis points on March 3 of this year.
“There is a need to lower interest rates because government funding costs are high,” said Udeeshan Jonas, chief strategist at equity research firm CAL.
“A stronger currency also gives them some leeway to ease interest rates. However, with a domestic debt restructuring plan hanging in the balance, it is doubtful that market rates will drop immediately.”
Sri Lanka moved from The IMF, which secured a $2.9 billion bailout, aims to complete debt restructuring talks in September, coinciding with the lenders’ first review.
The IMF expects GDP to contract by 3% this year, following a contraction of 7.8% last year. CBSL said that domestic economic activity is expected to gradually rebound from the later period . room for gradual policy easing in the coming period,” it said.
