Sri Lanka central bank sees room for rate cuts

May 13, 2009 (LBO) – Sri Lanka’s central bank Governor Ajith Nivard Cabraal said there was more room to cut rates and hinted that the monetary authority may return to a single signal policy rate. So far this year the monetary authority has cut its de facto main signal rate, the penal reverse repo rate, from 19.0 percent to 13.0 percent and also cut the statutory reserve ratio.

Another rate cut would see the gap narrow further or disappear.

“We have given very clear indications that we are relaxing monetary policy and in fact that has been made well known,” Cabraal told the 27th LBO-LBR CEO Forum.

Cabraal said the central bank now has more space to relax monetary policy even further after some aggressive rate cuts this year.

“We have told people what we are doing, so in that same sense we have made a clear indication to the country and to the world that we are relaxing monetary policy because in our view we have tamed inflation,” he said.

“And that gives us the space to make the economy grow with a little more attention,” he told the audience of top corporate executives at the Cinnamon Grand hotel Tuesday.

“So in that sense we will be looking at further relaxation …”

Cabraal also indicated the central bank might place less reliance on the unrestricted penal discount window for banks to borrow from which has served as a ceiling on overnight interest rates and as a benchmark rate for other market rates.

“We have a penalty rate (and) we have given an indication that our dependence on the penalty rate will be less and less.

“So those are necessities that are taking time and I believe that you could perhaps speculate, all good people should, when that can be done.”

Sri Lanka now has two policy rates, an 11.75 percent discount window with restricted access, and at 13.00 percent, which is the penal unrestricted window.