Sri Lanka cuts benchmark rate

Colombo: Sri Lanka's central bank unexpectedly cut a benchmark interest rate to the lowest level in almost six years, taking advantage of slowing inflation to boost economic growth.

The Central Bank of Sri Lanka lowered the reverse repurchase rate by half a percentage point to 9 per cent, the lowest level since November 2004, and kept the repurchase rate at 7.25 per cent, according to a statement on the Colombo-based bank's website today. All four economists surveyed by Bloomberg News had expected no change.

Sri Lanka's inflation slowed in July for a fifth straight month on increased farm supplies, as land recovered from Tamil Tiger rebels after the end of the island's civil war helped expand cultivation. The central bank said today it expects domestic credit conditions to ease, supporting a revival in economic growth.

"There is no danger to inflation with the rate cut," said Sarath Rajapakse, director of research at Capital Trust Securities Pvt. in Colombo.Consumer prices in the capital, Colombo, climbed 4.3 per cent in July from a year earlier after gaining 4.8 per cent in June. Inflation in Sri Lanka has slowed to less than half the average rate of the five years through 2009.

Regional moves

Sri Lanka's move contrasts with those in other Asian central banks including India, Malaysia and Thailand, which raised borrowing costs this year to tame rising prices and prevent asset bubbles.

Governor Ajith Nivard Cabraal said earlier this month the central bank would gauge the impact of last month's quarter- point interest-rate cuts before making its next move.

"While inflationary pressures in the domestic economy have continued to be benign in the recent months, enhanced prospects for domestic agricultural produce have further improved the outlook for inflation," the bank said today.

The yield on the four-year government bond fell 5 basis points to 8.95 per cent at 8:45 am in Colombo, according to Standard Chartered Plc. The Sri Lankan rupee, which has gained about 2.4 per cent since the civil war ended in May 2009, was little changed at 112.35 per dollar.