Sri Lanka Lowers Rates for Second Time in Two Months

By Cherian Thomas

Feb. 11 (Bloomberg) -- Sri Lanka’s central bank lowered its overnight lending rate for the second time in two months to support the island’s economic growth amid a global recession.

The Central Bank of Sri Lanka cut the penal interest rate to 16.5 percent from 17 percent, according to a statement posted on the bank’s Web site today. The repurchase rate was also reduced by a quarter point to 10.25 percent, the statement said.

The Colombo-based bank may cut rates further after Governor Nivard Cabraal said this week that a slowdown in inflation allows for “less tight” monetary policy. Sri Lanka’s inflation has halved since October as oil and other commodity prices plunged due to the global economic slump.

“The retreating inflation will enable monetary authorities to gradually reduce the penal rate,” said Danushka Samarasinghe, research manager at Asia Securities Co. in Colombo. “Sri Lankan interest rates have shown signs of weakening.”

The penal rate now serves as a ceiling on overnight interest rates and as a benchmark rate for other market rates, the central bank said Jan. 12.

Consumer prices in the capital Colombo rose 10.7 percent in January from a year earlier, after increasing 14.4 percent in December, the statistics department said Jan. 30.

‘Single Digit’

“It is expected that inflation will fall to a single digit in February and continue its decline in the coming months,” the central bank said in its statement today. “These interest rate reductions will lead to significant reduction in the cost of borrowing, resulting in economic activity being stimulated.”

To support growth, Sri Lanka in December unveiled a 16 billion rupees ($140 million) stimulus package that includes cutting retail fuel prices and removing some taxes.

The nation’s economic growth slowed to 6.3 percent in the third quarter of 2008 from 7 percent in the previous three-month period as declining overseas demand eroded the nation’s tea, rubber and textile exports.

Still, Cabraal said Feb. 7 Sri Lanka’s economy may expand faster than previously estimated in 2009 as the government adds stimulus measures and prospects of peace spur investment. Growth may be 6 percent this year, more than an earlier forecast of between 5 percent and 5.5 percent, Cabraal told Bloomberg News in Kuala Lumpur.

President Mahinda Rajapaksa on Feb. 4 said the government will decisively defeat the Liberation Tigers of Tamil Eelam rebels within “a few days” and free the South Asian nation from the “dark shadow of terrorism.” The Tamil Tigers have been fighting for 25 years for a separate homeland in the island nation, in a conflict that has killed more than 70,000 people.

The army says it has driven the Tamil Tigers from their main bases into an area of less than 200 square kilometers (77 square miles) in the northeast.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.