Sri Lanka leaves rates unchanged to support growth

COLOMBO: Sri Lanka's central bank left key interest rates unchanged on Thursday as expected, after cutting them in May to support the economy as tourism and investment plummeted in the wake of deadly suicide bombings in April.

The Central Bank of Sri Lanka kept the standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) steady at 7.50% and 8.50%, respectively.

"Considering the current and expected macroeconomic conditions, the Monetary Board was of the view that there is ample space for market lending rates to adjust downwards in response to the policy measures already taken," the central bank said in a statement.

"The central bank will continue to monitor the developments in the global and domestic financial markets and take appropriate further action as necessary to support economic growth in the context of well-anchored inflation and inflation expectations."

A Reuters poll predicted rates would be left alone.

Growth is expected to slow to 3% or less this year, according to the central bank, following the Easter Sunday attacks, which killed more than 250 people. Islamic State claimed responsibility.

The bombings hurt Sri Lanka's tourism sector, its third-largest and fastest-growing source of foreign currency, while many companies have put investment and expansion plans on hold.

Growth had already slowed to a 17-year low of 3.2% in 2018 as a protracted political crisis and past policy tightening sapped business confidence.

"We may see a lending rate cap later in August if the rates does not come down," said Dimantha Mathew, research head at First Capital Holdings.

Pressure on the rupee has eased after the country sold $2 billion of sovereign bonds last month.

The rupee fell to a record low in January due to foreign outflows from government securities. But it has rebounded over 4.3% since then.

The central bank's 50-basis-point rate cut in May came after it slashed banks' statutory reserve ratio (SRR) by 100 basis points in February to spur credit growth following a political crisis that triggered downgrades by all three major global rating agencies.

Government finances remain shaky with a heavy external debt repayment schedule between 2019 and 2022.

The International Monetary Fund said in May it was holding its forecast for Sri Lanka's 2019 growth at 3.5% despite the bombings, saying it was too early to assess the financial damage.

Analysts have also warned of elevated risks to Sri Lanka from international trade tensions and slowing global growth, with pressure on foreign direct investment and exports.

A presidential election set for later this year is also expected to hobble policymaking, analyst say, keeping consumer and business confidence in check in a further blow to consumption and investment.