COLOMBO (Reuters) -- Sri Lanka's central bank cut interest rates by 25 basis points (0.25%) on Wednesday in a surprise decision aimed at helping fuel the South Asian nation's economic recovery from its worst financial crisis in decades.
It said that it took the decision "in the absence of significant inflationary pressure" and that it expects inflation to remain below its 5% target in the medium term.
The Central Bank of Sri Lanka (CBSL) cut the standing deposit facility rate to 8.25% and the standing lending facility rate to 9.25%, it said in a statement.
Nine out of 14 economists and analysts polled by Reuters had predicted the monetary authority would keep interest rates unchanged to hedge against political uncertainty. The others in the poll had forecast cuts.
"The Board underscored the need to signal its desire to continue eased monetary conditions to sustain the revival of economic activity towards the full potential, in the absence of significant inflationary pressures," the CBSL said.
The central bank cut rates by 50 basis points in March in an easing cycle that has seen rates drop by 7.25 percentage points since June 2023, partially reversing 10.50 percentage points of increases since April 2022, when the island was battling a collapse in the economy.
Sri Lanka's economy is expected to grow 3% in 2024, helped by a $2.9 billion IMF lending program. The economy shrank 7.3% in 2022 and 2.3% last year.
Inflation dropped to 1.7% in June, a sharp contrast to the 70% in September 2022 during the height of the financial crisis.
"They have used the technical situation of inflation remaining below the bottom range of the inflation target, which is now reinforced by the electricity tariff cut, to cut rates," said Thilina Panduwawala, head of research at Frontier Research.
"In addition, they hope the cut will help reinforce the pickup in private-sector credit growth seen in May and June."
However, the latest rate reduction is unlikely to propel growth beyond the projected 3%, with markets likely to keep a close eye on Sri Lanka's upcoming presidential election, which is expected to be held before mid-October.
"The market will continue to be affected by the uncertainty caused by what appears to be a three-horse race for the presidential election," Panduwawala said.
