UPDATE 1-Sri Lanka unexpectedly cuts rates to boost faltering growth

Last Updated: Fri, May 10, 2013 03:50 hrs

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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 three-year highs.

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 month.

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 anonymity.

"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., ID:nL3N0DK0XA] (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Kim Coghill)

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