Sri Lanka cuts policy rates

Feb 11, 2009 (LBO) – Sri Lanka’s central bank has cut its discount rate that sets the upper limit of inter-bank transactions by 50 basis points to 16.50 percent and a restricted window by 25 basis points to 12.00 percent, amid falling inflation. “Inflation has been on a path of rapid deceleration, benefiting from the absence of upward pressures from international commodity prices and supported by the tight demand management policies put in place by the Central Bank,” the monetary authority said in its policy statement for February.

Inflation measured by the Colombo Consumers’ Price Index fell to 10.7 percent in January 2009 from 14.4 percent in December 2008.

In January the Central Bank cut the penal rate, which is the most easily accessed by market participants, by 200 basis points. The 12.00 percent window is restricted and is opened only when interbank market liquidity is short.

“These interest rate reductions by the Central Bank are expected to pass through to other market interest rates soon and lead to significant reductions in the cost of borrowing, resulting in economic activity being stimulated in the face of adverse conditions brought on by the global economic slowdown,” the Central Bank said.

The central bank also r