The bank reduced the repurchase rate and the reverse repurchase rate by 25 basis points to 7.50 percent and 9.50 percent respectively, lowering them from three-year highs.

A Reuters poll of 13 analysts had expected that both rates would remain unchanged.

The central bank had kept rates steady since April, following two hikes made earlier in the year when Sri Lanka also adopted a flexible exchange rate policy as part of a strategy to counter a balance-of-payments deficit.

Central Bank Governor Ajith Nivard Cabraal said the bank originally expected to make cuts from January, but reduced inflationary pressures had prompted the bank to move more quickly so that people could make spending and investment plans based on lower rates.

"The demand-driven inflation is subdued," Cabraal told Reuters. "There is no need to prolong it. It's an impetus now and the people can get ready with the plans ahead of the next year."

Annual inflation has risen due to a supply shortage mainly in foods, and notched three-month high of 9.5 percent in November, compared with 8.9 percent in October. That is still below the 42-month high of 9.8 percent struck in July due to an extended drought that hit the farm sector during the preceding months.

The bank also announced that a rule restrcting commercial banks credit annual growth to 18 percent, that was brought in last year, would be ditched at the end of this month.