Sri Lanka’s central bank unexpectedly reduced interest rates by 50 basis points to spur growth amid its worst financial crisis in decades. The Standing Deposit Facility Rate now stands at 8.50%, and the Standing Lending Facility Rate at 9.50%. This move surprised markets, with most economists anticipating no change.
The total interest rate cuts since last year amount to 700 basis points, aiming to steer the economy out of its crisis. The bank stated that, despite potential near-term inflation risks, the medium-term inflation outlook remains stable due to subdued economic activity. Lowering rates will aid in maintaining inflation at the targeted 5% over the medium term while facilitating economic growth.
The recent decision follows a pause in January to counter a spike in inflation resulting from a sales tax increase. Market interest rates need to continue downward as demand remains subdued. This rate reduction aims to boost growth further, leveraging recent policy changes. Though it enhances positive sentiment, it may not impact ongoing debt restructuring talks.
Sri Lanka seeks to restructure $12 billion of debt after defaulting in 2022. A recent IMF agreement offers confidence, paving the way for economic recovery after a 2.3% contraction in 2023 and 4.5% growth in the fourth quarter.
