By Uditha Jayasinghe
COLOMBO (Reuters) -Sri Lanka’s central bank cut the policy rate by 25 basis points in a surprise move on Thursday, aiming to foster stronger economic growth after a lingering financial crisis and buffer any fallout from potential U.S. tariffs.
The Central Bank of Sri Lanka (CBSL) changed the overnight policy rate to 7.75%, it said in a statement, in contrast with a Reuters poll of 12 analysts and economists who had unanimously expected the bank to maintain its policy stance.
“The board is of the view that this measured easing of monetary policy stance will support steering inflation towards the target of 5%, amidst global uncertainties and current subdued inflationary pressures,” the bank said.
Supported by a $2.9-billion programme from the International Monetary Fund (IMF), Sri Lanka has steadily recovered from a financial crisis caused by a severe shortfall of foreign exchange reserves three years ago.
The island nation turned around its economy to post growth of 5% in 2024, and the World Bank predicts it will grow 3.5% this year.
Inflation, which stood at minus 2% in April on the year, is expected to turn positive in the early part of the third quarter, the central bank added.
Inflation is only expected to reach the bank’s target of 5% in 2026, analysts said.
“While not being the main driving force, the cumulative concern of domestic inflation and a potential global recession may have prompted officials to make this marginal downward adjustment,” said Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers.
Before the United States suspended them for three months, its tariffs of 44% on Sri Lanka threatened to affect about $3 billion of the country’s exports and possibly undermine its economic recovery.
Officials of both sides are in talks to strengthen trade relations.
“If the language in the statement is interpreted to mean further cuts in the year with inflation staying lower than expected, then rates can shift down a bit more,” said Thilina Panduwawala, head of research at Colombo’s Frontier Research.
“That can help sustain the robust growth momentum we have been seeing and offset some impacts from global volatility.”
(Reporting by Uditha Jayasinghe; Editing by Swati Bhat and Clarence Fernandez)
