Central Bank seen standing pat but rate cut not ruled out

• CB cut rates by 50 bps in May to support growth
• Economic growth expected to slow to 3% or less this year

(Colombo) REUTERS: The Central Bank is expected to leave its key interest rates unchanged on Friday, a Reuters poll showed, but a surprise rate cut is not ruled out due to sluggish economic growth ahead of a presidential election later this year.

Ten out of 12 economists surveyed expected the Central Bank of Sri Lanka to keep both its Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) steady at 7.50 percent and 8.50 percent, respectively.

One analyst expected both rates to be cut by 50 basis points (bps) and one by 25 bps. Seven out of the 12 analysts expect the Central Bank to cut the rates by 50 bps before the end of this year. All of the analysts predicted the statutory reserve ratio (SRR) would be kept at 5.00 percent. “Some rates have come down since the last rate cut, but we are yet to see the full impact of it,” said Ceylon Chamber of Commerce Chief Economist Shiran Fernando.

Others said a rate cut would put more pressure on the rupee currency as it could result in heavy foreign outflow from government bonds.

However, one economist, who expects a 25 bps cut, said the government has to show some progress on economic growth before a presidential election that must be held
by December 9.

“The last rate cut has failed to boost the credit and economic growth. Bad loans are also on the rise. If the country has to see some growth, a rate cut is needed now,” the Colombo-based analyst said, asking not to be named as he is not authorised to talk to media. 

The Central Bank cut rates by 50 basis points in May to support the economy.

Economic growth had already slowed to a 17-year low of 3.2 percentin 2018 and the Central Bank expects it to slow to three percent or less this year, while a Reuters poll has predicted growth will be its lowest in nearly two decades this year.

The tourist sector, Sri Lanka’s third-largest source of foreign currency, was badly hit by the Easter Sunday bomb attacks by Islamist militants that killed more than 250 people, and pressure on the rupee currency has been building since early this month as foreign investors started to pull out their funds after the Federal Reserve’s rate cut.

The government’s finances remain under pressure with a heavy external debt repayment schedule between 2019 and 2022.