CB seen cutting rates to boost growth after Easter attacks

Thursday, 30 May 2019 00:15 - - {{hitsCtrl.values.hits}}

Reuters: The Central Bank is widely expected to cut its key interest rates at a meeting on Friday, a Reuters poll showed, to support the economy after tourism and investment plummeted in the wake of Easter Sunday bombings.

Sri Lanka is unlikely to hit its full-year economic growth target of 3-4% following the bomb attacks, junior finance minister Eran Wickremeratne told Reuters last week.

A Reuters poll has predicted growth would slump to its lowest in nearly two decades this year. The attack has badly hurt Sri Lanka’s tourism sector – the country’s third-largest and fastest-growing source of foreign currency – while many corporates have put their investment and expansion plans on hold, analysts say.

The Central Bank has yet to assess the economic impact of the Easter bombings, which killed more than 250 people. Militants Islamic State has claimed responsibility for the attack.

The economy is already struggling with growth slowing to a 17-year low of 3.2% in 2018 as a protracted political crisis and past policy tightenings sapped business confidence and cooled investment.

Seven out of 14 economists surveyed expected the Central Bank of Sri Lanka to cut both of its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) by 50 bps to 7.50% and 8.50%, respectively. Two analysts expected both rates to be cut by 25 bps while two predicted the Central Bank would leave the rates unchanged.

One analyst expected the Central Bank to cut SDFR by 50 bps and SLFR by 75 basis points, while two analysts expected a 25 bp cut in only the SLFR. All analysts predicted the Statutory Reserve Ratio (SRR) would be kept steady at 5.00%.

“The Central Bank will have to cut the rates aggressively to counter the slow growth. If they maintain the same rates, there is unlikely any credit growth in the economy,” said First Capital Holdings Research Head Dimantha Mathew.

However, other analysts who predicted no change to rates said a cut would encourage foreign outflows from the country’s bonds, putting pressure on the rupee currency. The rupee, which fell to a record low in early January due to foreign outflows from government securities and the country’s political uncertainties, has bounced more than 3.6% since then.

The Central Bank unexpectedly slashed banks’ SRR by 100 basis points in February to spur credit growth after a political crisis triggered credit downgrades by all three major global rating agencies. That followed a move to raise the SDFR by 75 bps and the SLFR by 50 bps in November, accompanied by a reduction in the SRR by 150 bps to 6.00%. Government finances remain shaky, and the island nation has a heavy external debt repayment schedule between 2019 and 2022.

The International Monetary Fund said early this month it was holding its forecast for Sri Lanka’s 2019 economic growth at 3.5% in spite of the devastating Easter bombings, saying it was too early to assess financial damage.