(Bloomberg) -- Sri Lanka’s central bank lowered its benchmark interest rates to spur growth as inflation held below the monetary authority’s target.
The Central Bank of Sri Lanka reduced the standing lending facility rate by 25 basis points to 9.25%. Only four of the 17 economists surveyed by Bloomberg had predicted the decision, with four others expecting a half-point cut and the rest penciling in a hold. The deposit facility rate was lowered to 8.25%.
“The Board considered the need to signal the continuation of the eased monetary policy stance, thereby inducing a further reduction in market lending rates to support economic activity, amidst a benign inflation outlook,” the central bank said in a statement on Wednesday.
Weak demand is preventing inflation from exceeding the central bank’s 5% target this year, providing space for policymakers to cut rates and support the recovery from an unprecedented economic crisis in 2022. Inflation is likely to remain below target of “by a sizable margin” for the next several months before aligning with the goal over the medium term, the central bank said.
Nevertheless, the economic outlook is getting brighter. The South Asian island struck a deal to restructure $12.6 billion of bonds with its commercial creditors, bringing the nation closer to completing its debt overhaul that allows it to tap more funding from a $3 billion International Monetary Fund bailout.
The government had already inked debt restructuring deals with official creditors, including China, India and the Paris Club as well as with the holders of its local debt.
Sri Lanka is due to set the date for the presidential elections before mid-October. The distribution of the growth dividend, jobs and the impact of price gains on households are likely to be key issues for voters.
--With assistance from Shinjini Datta and Shwetha Sunil.
(Updates with central bank comments in third and fourth paragraphs)
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