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#SriLanka central bank delivers steep rate cuts to support virus-hit economy

By Abhirup Roy and Derek Francis

MUMBAI/BENGALURU (Reuters) – Sri Lanka’s central bank delivered an unusually large cut to two of its key interest rates on Thursday as it ramped up efforts to support an economy which has been battered by the COVID-19 pandemic.

The Central Bank of Sri Lanka eased monetary policy for the fourth time since March in a bid to boost growth “severely” hit in the second quarter and to encourage banks to “aggressively enhance lending” amid subdued inflation, it said in a statement https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20200709_Monetary_Policy_Review_july_2020_e_nG5d8.pdf.

The CBSL cut its Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) by 100 basis points (bps) each to 4.50% and 5.50% respectively.

That was one of the biggest rate cuts since the 2009 global financial crisis, analysts said, and took cuts so far this year to a total of 250 bps for each benchmark rate.

People walk past the main entrance of the Sri Lanka’s Central Bank in Colombo, Sri Lanka

“The Monetary Board wishes to strongly reiterate that all financial institutions led by licensed commercial banks (LCBs) must pass on the full benefit of the cumulative reduction of 250 basis points in policy interest rates thus far during

the year without delay,” the CBSL said in the statement.

Thursday’s cut was also the seventh since May last year, when deadly Easter bomb attacks triggered a slump in investment and tourism.

“We do however think monetary policy adjustments made are warranted at the moment, given the lack of fiscal space to stimulate growth in economic activity,” said Trisha Peries, head of economic research at Frontier Research.

“At the moment we are not too concerned of a spike in inflation, given the poor performance in private sector credit so far,” she said.

Credit extended to the private sector contracted significantly in May, despite surplus liquidity with banks, CBSL said, adding that it was expected to pick up in the period ahead.

But the central bank kept the Statutory Reserve Ratio (SRR) unchanged and urged banks to pass on the liquidity from 300 bps worth of SRR cuts so far this year to private sector borrowers.

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