Central Bank of Sri Lanka

April 15, 2015

Sri Lanka’s Monetary Board surprised investors with a 50-basis point cut in its lending rate to 7.5% and borrowing rate to 6.0%.  This was the first change in those rates in a year and a half.  They had been cut by 50 bps in October 2013 and previously by that amount in August 2013 and December 2012, so today’s action brings the cumulative reduction in this easing cycle to 200 basis points. 

Noting that on-year total CPI inflation was only 0.1% in March, a released statement justifies today’s action and warns of possible further easing in the following passage.

Current behavior of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year. Inflation is projected to remain at low mid-single digit level in 2015. Therefore, there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behavior of market interest rates consistent with economic growth outlook. If any of subsequent interim effects of further monetary relaxation are found to be of concern over other economic variables, a mix of other monetary policy tools is available to fine-tune such effects towards achievement of current objectives of the monetary policy.  The relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behavior of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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