Sri Lanka cuts rate for second time as inflation halves

SRI Lanka’s central bank cut its benchmark rate for the second consecutive meeting, as faster disinflation gave policymakers the space to focus on recovery from the worst economic crisis in seven decades.

The Central Bank of Sri Lanka lowered the standing lending facility rate by 200 basis points to 12 per cent, according to a statement on its website on Thursday (Jul 6). Four of the six economists surveyed by Bloomberg had forecast cuts ranging from 150 to 250 basis points, while two predicted a hold.

“The Board arrived at this decision following a careful analysis of the current and expected developments, including the faster-than-envisaged disinflation process,” the central bank said.

The decision comes after recent developments cleared the way for further easing. These included the latest price print showing that the inflation rate halved in June, as well as a local debt revamp. The strategy, which mostly left out domestic commercial banks, bolstered the Sri Lankan rupee and sent the nation’s stocks and dollar bonds surging.

The monetary authority said the successive easing “will provide the impetus for market interest rates to adjust downwards in line with the faster moderation of inflation, so that monetary conditions remain accommodative”. It added that it would “consider taking appropriate administrative measures to ensure timely and adequate pass-through” of the policy.

On Jun 1, the central bank unexpectedly cut the benchmark rate by 250 bps, its first policy easing in about three years. Lowering policy rates further would ease pressure on treasury yields and make debt obligations cheaper. The details of Sri Lanka’s debt restructuring with foreign bondholders and bilateral creditors still need to be hammered out.

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Sri Lanka’s economy shrank at a slower pace last quarter as fresh funds eased widespread shortages. Authorities are implementing reforms to strengthen the nation’s fiscal health and bring in price stability ahead of the first review in its US$3 billion International Monetary Fund loan programme, around September this year.