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By Ranga Sirilal and Shihar Aneez
COLOMBO, May 10 (Reuters) - Sri Lanka's central bank
unexpectedly cut its key monetary policy rates by 50 basis
points on Friday, following some of its regional peers, to boost
economic growth in the face of subdued demand.
It reduced its repurchase rate to 7.00 percent and reverse
repurchase rate to 9.00 percent, to their lowest in more than
one year after cutting them by 25 basis points in December from
Analysts had expected the central bank to keep policy on
hold on Friday but predicted it could lower borrowing costs at
its next meeting in June.
The rate cut comes despite comments from the International
Monetary Fund (IMF) last week which said Sri Lanka must not ease
monetary conditions as inflation remains a concern, even though
the prices rose at a slower pace in April than in the previous
The central bank said in a statement there was now a need to
stimulate the domestic economy after a slower-than-expected
pick-up in economic activity in the first few months of 2013.
"Credit growth has been rather slow," Governor Ajith Nivard
Cabraal told Reuters. "So there was a need to give impetus to
stimulate growth and we decided to cut the rates. Inflation is
also well under control."
The island-nation's economic growth slowed to a three-year
low of 6.4 percent last year, easing from a record high of 8.2
percent in 2011.
The central bank has estimated 7.5 percent growth this year,
much higher than IMF's 6.25 percent forecast.
Annual inflation eased to 6.4 percent in April from a 7.5
percent a month earlier, but May inflation is expected to
accelerate due to sharp increase in electricity tariffs, the
state-run Department of Census and Statistics has said.
Danushka Samarasinghe, the head of research at Colombo-based
TKS Securities said inflation risks may be to the upside if
commercial banks pass on the full 50 basis point rate cut and it
does stimulate demand.
The central bank held commercial banks' Statutory Reserve
Ratio (SRR) steady at 8 percent, but increased their reserve
maintenance period to two weeks from one week from June 1 to
give them greater flexibility in managing liquidity.
"When the reserve maintenance period is short, commercial
banks are sometimes compelled to borrow at higher rates to
maintain the reserve," a currency dealer said on condition of
"But the central bank's decision will help to reduce
volatility in market interest rates.
Central banks in Australia, South Korea, and India cut rates
earlier this month.,
(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Kim