Sri Lanka resumes rate cuts to boost growth

Sri Lanka’s central bank continued interest rate cuts on Thursday to encourage growth as the government strives to increase income and repair its balance sheets in order to maintain IMF financial support.

The Central Bank of Sri Lanka reduced the standing deposit and loan facility rates by 100 basis points each, to 10% and 11%, respectively, according to a statement. The cutbacks came after the Fed decided to hold interest rates steady at its previous policy meeting in August.

“The Board made this decision after careful consideration of current and anticipated events,” Sri Lanka’s central bank said in a statement.

The rate drop was in line with market forecasts and comes as South Asia’s inflation has slowed.

Sri Lanka’s economy was hit by its worst financial crisis in more than seven decades last year, with inflation skyrocketing and foreign exchange reserves dropping to record lows, severely limiting the country’s capacity to buy basic goods.

The central bank responded by raising interest rates by a total of 10.5 percentage points in order to manage inflation and restore reserves to support the currency.

However, since June, Sri Lanka’s central bank has decreased rates by a total of 550 basis points as the economy stabilized following the IMF’s $2.9 billion rescue package in March.

Following the rate decreases, the price of the country’s foreign bonds climbed, with the May 2027 maturity bond leading the gains.

Due to a projected shortage in government revenue, Sri Lanka was unable to reach an agreement with the IMF at its first review of the rescue package last month.