Sri Lanka To Loosen Monetary Policy Post Inflation Decline

Following a hefty 250-basis-point interest rate decrease in June, Sri Lanka's central bank is largely expected to loosen monetary policy further on Thursday, as it seeks to reignite economy despite a sharp decline in inflation.

Sri Lanka's economy tanked last year as its foreign exchange reserves plummeted to historic lows, plunging the country into its worst financial crisis in more than seven decades. However, after receiving a $2.9 billion bailout from the International Monetary Fund (IMF) in March, the island has been progressively restoring its reserves, which has helped to boost the currency. Its once-rising inflation rate fell to 12% year on year in June.

The median estimate in a poll is for a 200-basis-point rate cut. Seven economists called for a 200 bps reduction, three expect a 100 bps cut while one said the central bank (CBSL) could cut by 300 bps.

The decision will be announced via a statement at 7:30 a.m. (0200 GMT).

At its last meeting in June, the CBSL reduced its standing deposit facility rate and standing lending facility rate (SLFR) in a surprise move to 13 per cent and 14 per cent, respectively.

"Economic contraction, lower than expected inflation is giving the central bank space to cut rates. It's the right thing to do for growth," said Murtaza Jafferjee CEO of J.B. Securities.