Sri Lanka likely to resume rate cuts tomorrow to spur growth

REUTERS: Sri Lanka’s Central Bank is expected to resume interest rate cuts tomorrow as it attempts to bolster a recovery from its worst economic crisis in decades, capitalising on low inflation to complete the first review of a US$ 2.9 billion IMF bailout package.
The median estimate in a Reuters poll of 17 economists and analysts is for a 100-basis-point (bps) cut in both the Standing Deposit Facility Rate and the Standing Lending Facility rate, taking them to 10 percent and 11 percent, respectively.

“We are sort of pushing towards a rate cut. Any more delays might be too late since we only have one more policy rate decision this year,” said Dimantha Mathew, Head of Research at First Capital.

“Definitely over the next six months we expect rates to be cut by 200 bps points: This time 100 bps with the next 100 bps coming in the next quarter.”
The Central Bank of Sri Lanka (CBSL) has already reduced rates by 450 bps in two moves over June and July after raising them by a record 1,050 bps from March 2022 to counter the island’s worst financial crisis in over seven decades. Rates were kept unchanged in a surprise move in August, as CBSL preferred to wait and let the impact of its recent rate filter through the economy.
The economy is expected to shrink 2 percent this year according to the CBSL’s projections, after contracting 7.8 percent in 2022. The World Bank raised its economic forecasts on Tuesday but they remain far more bearish, calling for a 3.8 percent contraction in 2023.

But the global lender expects gross domestic product (GDP) will grow 1.7 percent next year, up from an earlier forecast of 1 percent. Since finalising a four-year programme with the International Monetary Fund (IMF) in March Sri Lanka has stabilised its economy, reducing inflation from 69 percent to 1.3 percent in a year, boosting reserves and strengthening its currency by 12 percent.
But the IMF did not reach a staff-level agreement with Sri Lanka in its first review last month, due to a potential shortfall in government revenue generation which could delay the release of the second tranche of funds to the island nation.
The policy decision will be announced at 7:30 a.m. tomorrow