COLOMBO: Sri Lanka's central bank on Wednesday surprised markets by cutting key policy rates to record lows in a move aimed at boosting economic growth, but some analysts warned the easing risked further eroding a shaky balance of payments position.
The monetary authority said it will pursue a relaxed policy stance until stubbornly high borrowing costs come down, noting that business investment remains low despite soft inflation.
It cut the standing deposit facility (SDF) rate and the standing lending facility rate (SLFR) by 50 basis-point each to 6.00 percent and 7.50 percent, respectively. A Reuters poll had predicted the rates to be left unchanged.
"Current behaviour of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year," Central Bank of Sri Lanka said in a statement.
Annual inflation hit a record low of 0.1 percent in March as growth has slowed in recent quarters amid slack private consumption, with the $76 billion economy growing 6.4 percent in the fourth quarter - the weakest in almost two years.
The central bank estimates growth at 7.5 percent this year, but depressed private credit growth and high borrowing costs have hurt sentiment.
Average Weighted Prime Lending Rate (AWPR), a proxy for market lending rates, was at 7.14 percent as of April 10, the highest level since September last year.
BOP, RUPEE PRESSURED
The key policy rates have been kept steady at record lows for 14 straight months through March, and some analysts say Wednesday's surprise move risks inflaming a worsening balance of payments (BOP) picture and putting more pressure on the rupee currency.
"I don't think it is an appropriate move given the pressure on the balance-of-payments we have seen in the last six months," Amal Sandaratne, CEO at Colombo-based Frontier Research told Reuters.
Latest official estimates for January 2015 showed the BOP at a deficit of $696.5 million, compared to $732.9 million surplus in the year ago period.
That has pressured the rupee, which is down 1.3 percent so far this year.
However, the central bank said the BOP outlook remains favorable in 2015, citing positive impacts including from continued inflows from current account related transactions and a lower fuel import bill.
The central bank has been defending the rupee heavily since December amid high local borrowing to finance populist budget policies ahead of Parliamentary elections expected as early as June.