Sri Lanka cuts interest rates to spur growth

Sri Lanka’s central bank on Tuesday cut key interest rates in a bid to encourage more investment in the island’s economy as it recovers from decades of ethnic warfare.

The Central Bank of Sri Lanka lowered its benchmark repurchase rate by 25 basis points to 7.0 percent, while the reverse repurchase rate was cut by 50 basis points to 8.0 percent.

The bank said it was able to lower interest rates to provide for “new and wider investments to be made in all sectors of the economy, including new growth areas, without fuelling undue inflationary pressures”.

The bank said Sri Lanka was on target to have maintained a budget deficit of 8.0 percent of GDP in 2010 and this year the deficit would likely be trimmed to the targeted 6.8 percent.

Year-on-year inflation was 6.9 percent in December, but the bank said it expected inflation in 2011 to fall a couple of points.

The country’s economy grew 8.0 percent in 2010, up from 3.5 percent a year earlier, when security forces were in the final stages of crushing Tamil Tiger rebels and ending decades of bloodshed.

Sri Lanka’s foreign reserves slipped to less than a billion dollars during the final months of the conflict, forcing the government to secure a 2.6 billion-dollar bailout package from the IMF in July 2009.