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Economy

Sri Lanka cuts interest rates to spur growth after Easter attacks

People walk past the main entrance of the Sri Lanka's Central Bank in Colombo.   © Reuters

COLOMBO (Reuters) -- Sri Lanka's central bank cut its key interest rates on Friday, as widely expected, to support its faltering economy as overall business and consumer confidence slumped in the wake of last month's deadly bomb attacks.

The Central Bank of Sri Lanka cut both the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 50 bps each to 7.50% and 8.50%, respectively. A Reuters poll of 14 economists had expected both rates to be cut.

In its policy statement, the central bank said market lending rates had failed to show any sign of "commensurate downward adjustment" despite recent liquidity injections and declines in the call money rate, government bond yields and the maximum interest rates on deposit products.

Sri Lanka's junior finance minister, Eran Wickremeratne, told Reuters last week the economy was unlikely to hit its full-year economic growth target of 3-4% following the bomb attacks.

A Reuters poll has predicted growth would slump to its slowest in nearly two decades this year.

The economy had already been struggling with growth at a 17-year low of 3.2% in 2018 as a protracted political crisis and past policy tightenings sapped business confidence and cooled investment.

In April, private sector credit growth slowed to near a 5-1/2-year low of 8.8 percent, central bank data showed.

The Easter attack has badly hurt Sri Lanka's tourism sector - the country's third-largest source of foreign currency and its fastest-growing - while many corporates have put their investment and expansion plans on hold, analysts say. Islamic State has claimed responsibility for the attack.

The central bank said the Easter Sunday attacks, which killed more than 250 people, have affected confidence and disrupted tourism although it is yet to assess its full impact on the economy.

"Although normalcy is gradually returning to economic activity, a lower than initially projected growth could be anticipated during 2019," it said.

Analysts said the rate cuts would help growth, but at the expense of stability in the country's financial markets, as lower rates put pressure on the local rupee and drive foreign funds out of domestic bonds.

"This will significantly affect the lending rates, already last week we saw average weighted prime lending rates coming down by about 38 basis points, so we expect that trend to continue and lending rates to slowly come down," said Dimantha Mathew, research head, First Capital Holdings.

"Beyond August and September, we will start seeing real growth in the credit."

The rupee, which fell to a record low in early January due to foreign outflows from government securities and political uncertainties, has bounced more than 3.6% since then.

Government finances also remain shaky, and the island nation has a heavy external debt repayment schedule between 2019 and 2022.

The government is planning to raise up to $1.5 billion via sovereign bonds, tapping global capital markets for the second time in three months as it seeks new funds to repay loans.

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