Sri Lanka Central Bank Lowers Interest Rate by 250 Points As Economy Recovers

Sri Lanka's central bank surprised markets by lowering interest rates by 250 basis points on Thursday, citing faster-than-expected inflation and a more benign price outlook.

The Central Bank of Sri Lanka (CBSL) reduced its standing deposit and lending facility rates to 13% and 14%, respectively, from 15.5 percent and 16.5 percent previously.

"Policy interest rates have been reduced in light of the faster deceleration of inflation, the benign inflation outlook, and the easing of BOP (balance of payment) pressures, thereby reinforcing the economy's rebound," the CBSL said.

Sri Lanka's key Colombo Consumer Price Index rose 25.2% year on year in May, down from 35.3% in April, relieving some of the pressure on the crisis-hit economy, which has crumbled under soaring inflation caused by the country's worst financial crisis in over seven decades.

In September of last year, the index reached a high of 69.8 percent year on year. In April, the national inflation rate was 33.6 percent, down from 73.7 percent in September.

The IMF has set an inflation target of 15.2 percent for Sri Lanka this year, but the CBSL is aiming for single-digit inflation by September.

"Headline inflation is expected to reach single digit levels in early Q3-2023 and stabilise around mid-single digit levels in the medium term," the bank said.

Thirteen of the fifteen analysts and economists polled by Reuters expected the central bank to keep benchmark interest rates unchanged at its fourth policy rate announcement this year.

To combat inflation, the central bank raised interest rates by a record 950 basis points last year, and again on March 3 this year.