Sri Lanka central bank cut rates to boost post-war recovery

June 16, 2009 (LBO) – Sri Lanka cut its main policy discount rate by 50 basis points to 11.00 percent to boost credit and support post war economic recovery, amid muted inflation, the Central Bank said. The defeat of Tamil Tigers last month has raised expectations of post war reconstruction and recovery.

“The renewed business confidence and investor perceptions along with reconstruction and development work already embarked on in the newly liberated areas, is expected to generate new economic activity,” the Central Bank said in its June monetary policy statement.

“Today’s monetary policy decision will support such economic activity.”

Inflation

In the month of May inflation rocketed 2.0 percent driving 12-month inflation to 3.3 percent from 2.9 percent, as peg with the US dollar firmed following a float and the monetary base started to be driven by foreign assets.

Most reasonably competent central banks with soft-dollar pegs and policy rates higher than the US, including China, Malaysia and Taiwan find it very easy to keep inflation below 5.0 percent.

“Although year-on-year inflation is projected to pick-up gradually during the second half of the year from the cu