Sri Lanka unexpectedly cuts rates by 250 bps as inflation eases

The IMF has set Sri Lanka a inflation target of 15.2% for this year but the CBSL is eyeing a more ambitious target of single digit inflation by September

Sri Lanka's central bank caught markets off-guard by cutting its key rates by 250 basis points on Thursday, as it cited inflation easing faster than expected and the price outlook turning more benign.

The Central Bank of Sri Lanka (CBSL) cut its standing deposit facility rate and standing lending facility rate to 13 per cent and 14 per cent, respectively, from 15.5 per cent and 16.5 per cent previously.

"Policy interest rates reduced in view of the faster deceleration of inflation, benign inflation outlook and the easing of BOP (balance of payment) pressures, thereby reinforcing the rebound of the economy," the CBSL said.

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Sri Lanka's key Colombo Consumer Price Index eased to a rise of 25.2 per cent year-on-year in May from 35.3 per cent in April, reducing some stress on the crisis-hit economy which has crumpled under soaring inflation caused by its worst financial crisis in over seven decades.

The index peaked at a 69.8% year-on-year surge in September last year. The national inflation rate was at 33.6 per cent in April, easing from 73.7 per cent in September.

The IMF has set Sri Lanka a inflation target of 15.2 per cent for this year but the CBSL is eyeing a more ambitious target of single digit inflation by September. "Headline inflation is forecast to reach single digit levels in early Q3-2023, and stabilise around mid-single digit levels over the medium term," the bank said.

Thirteen out of the fifteen analysts and economists polled by Reuters had expected the central bank to hold benchmark rates steady at its fourth policy rate announcement this year.

The central bank raised rates by a record 950 basis points last year to tame inflation and by 100 bps on March 3 this year.