Sri Lanka growth slowdown risk from bombings could prompt interest rate cut

ECONOMYNEXT – The prospect of Sri Lanka’s central bank loosening monetary policy at its review this week has been enhanced given the heightened risk to economic growth posed by April’s suicide bombings, its governor Indrajit Coomaraswamy has indicated.

Asked at a public forum about the prospect of an interest rate cut, Coomaraswamy said: “The monetary board in its forward guidance has said that if current conditions prevail it would give serious consideration to relaxing monetary policy.”

The central bank kept policy rates unchanged in its April 8 monetary policy announcement, saying: “ . . . if current trends in global financial markets, trade balance, and credit growth continue, policy interest rates could be reduced in the period ahead, given well anchored inflation and inflation expectations.”

“All those factors still prevail,” Coomaraswamy told the recent forum on the state of the economy as reflected in the bank’s 2018 annual report.

Suicide bombings by Islamist extremists of three churches and three hotels which killed over 250 people in April has hit tourism badly and would reduce already slow growth further, Coomaraswamy said.

Private credit growth was neutral and real and nominal interest rates were still very high, he said.

“There is the addition of a significant downside risk to growth as a result of these events,” Coomaraswamy said, refering to the bombings and subsequent anti-Muslim violence.

“The monetary board (of the central bank) will take all that into account when they come to a conclusion.”

The next monetary policy announcement is on Friday, May 31.

The central bank has said lending rates have not come down fast enough and that it also is trying to force down bank deposit rates so interest rates on loans could be cut.





Private sector analysts also said a policy rate cut was increasingly likely.

A “rate cut could be inevitable to revive overly sluggish economic and credit growth,” First Capital Research said in a report.

Capital Trust Securities said in a report that lower interest rates could drive demand for stocks.

It said Central Bank governor Indrajit Coomaraswamy “has hinted a strong possibility of a policy rate cut at the next monetary policy review meeting.”

 “All options are there,” Coomaraswamy told Bloomberg Television in an interview in Singapore. “It could be a SRR (Statutory Reserve Ratio), it could be a policy-rate reduction, it could be a combination of the two.”
(COLOMBO 27 May 2019)

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