CB cuts rates to multi-year lows, ignores IMF

Wednesday, 16 October 2013 00:35 - - {{hitsCtrl.values.hits}}

REUTERS: Sri Lanka’s Central Bank cut key policy interest rates by 50 basis points to multi-year year lows in a surprise move on Tuesday to spur economic growth, just three weeks after the International Monetary Fund advised it to hold rates steady. “We thought it is a right time to give a push to the economy,” Central Bank of Sri Lanka Governor Ajith Nivard Cabraal told Reuters after announcing the rate cut.

“We would be able to achieve a 7% plus growth in the next year, even closer to 8%,” he said. Sri Lanka is investing heavily in infrastructure, with major new port and airport projects underway along with urban and rural road building. Growth this year was forecast at 7.5%, after slumping to a three-year low of 6.4% in 2012. The decision to cut interest rates defied expectations. A Reuters poll of 11 analysts had expected the Central Bank’s monetary board to keep the monetary policy rates unchanged. The IMF had recommended on 25 September that the Central Bank should keep policy rates steady to assess the impact of the US Federal Reserve’s possible tapering of stimulus program in coming months. Cabraal downplayed the risk posed to Sri Lanka by the Fed’s expected tapering, though foreign selling of government debt had helped push the rupee to a record low of Rs. 135.20 per dollar on 28 August. “I don’t think Fed tapering will have an impact on us as we have already factored in. Cabraal said. “In the event of tapering, I don’t think we will have outflows, because those investors did not come due to QE (quantitative easing).” "We thought it is a right time to give a push to the economy. We would be able to achieve a 7% plus growth in the next year, even closer to 8%....I don’t think Fed tapering will have an impact on us as we have already factored in. In the event of tapering, I don’t think we will have outflows, because those investors did not come due to QE (quantitative easing)... – Central Bank Governor Nivard Cabraal" Having steadied off its low, the rupee is now just 2.5% down since the start of the year. The exchange rate, which is closely shepherded by the central bank, opened steady at Rs. 130.85 per dollar, while the share market opened 0.01% down, as markets showed scant reaction to the rate cuts. With the latest easing, the central bank has cut policy rates by 125 basis point since December, and eased other policy tools. The repurchase rate was slashed to 6.50%, a level unseen since the Central Bank began compiling data for the interest rate in December 1999. The reverse repurchase was cut to 8.50%, its lowest since February 2012. The Central Bank said in a statement that given the benign outlook for inflation, it eased to 6.2% year-on-year in September, there was further space to ease monetary policy. Cabraal said the outlook was positive so long as there were no sudden spikes in global oil or commodity prices in the next 12 months.