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Sri Lanka Follows Indonesia With Second Rate Cut to Spur Growth

Anusha Ondaatjie and Karthikeyan Sundaram

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Sri Lanka cut interest rates for a second time this year, a day after Indonesia did the same, as central banks in the region move to cushion their economies against a global slowdown and trade tensions.

The Central Bank of Sri Lanka lowered its benchmark standing lending facility rate to 8% from 8.5% on Friday, in line with the forecasts of four of the nine economists surveyed by Bloomberg. The rest predicted no change.

Policy makers across the region from New Zealand to India have cut rates this year amid a more dovish U.S. Federal Reserve and rising global risks. Indonesia’s central bank unexpectedly cut interest rates Thursday to help cushion its economy against the worsening global environment.

Sri Lanka inflation slowed to 3.3% in July -- the lowest level this year and well below the central bank’s desired range of 4%-6% -- giving policy makers room to focus on spurring growth after terrorist attacks in April hit the tourism industry. The central bank sees gross domestic growth in 2019 at 3.1%, a slight improvement from its forecast last month, when it lowered the reading to 3% from around 4%.

“Even last year we had muted growth, but our room to maneuver or move to a more accommodative monetary policy was constrained significantly by capital outflows," Governor Indrajit Coomaraswamy said in an interview with Bloomberg Television. “That constraint has now been taken away” as central banks in major economies and emerging markets turn more dovish.

Policy makers also cut the standing deposit facility rate on Friday to 7% from 7.5%. Both key interest rates were lowered by 50 basis points each in May.

The rupee was little changed after the decision, after falling 0.4% to 179.50 on Thursday -- poised for its biggest weekly decline since November.

“We think this will probably mark the last cut this year” for Sri Lanka, said Alex Holmes, an economist at Capital Economics Ltd. in Singapore. “While the bank will be keen to support the economy, the need to prop up the currency will limit the scope for further loosening.”

(Updates with governor’s comments in fifth paragraph.)

--With assistance from Manish Modi, Rishaad Salamat, Juliette Saly and Adrian Wong.

To contact the reporters on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net;Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

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