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Sri Lanka cuts interest rates to five-year low

Sri Lanka’s central bank on Wednesday cut its key interest rates to a five-year low in a bid to boost economic growth as the island recovers from decades of ethnic violence.

Sri LankaThe Central Bank of Sri Lanka lowered its benchmark repurchase rate by 50 basis points to 7.50 percent, while the reverse repurchase rate was cut by 75 basis points to 9.75 percent.

“Benign inflation has enabled the Central Bank to gradually relax its monetary policy stance on several occasions (in 2009) in order to support economic activity,” the bank said.

Annual inflation as measured by the Colombo Consumer Price Index fell to 1.4 percent in October compared to 20.2 percent a year earlier as the government reduced prices of essential food.

The bank forecasts year-end inflation to be around five percent and between five to six percent in 2010.

Last month, Sri Lankan President Mahinda Rajapakse ordered state-run banks to slash their lending rates to between eight to 12 percent from an earlier spread of between 15 and 22 percent.

Since January, the central bank has lowered the repurchase rate by 300 basis points, while the reverse repurchase rate has been cut by 225 basis points.

The central bank said market interest rates had dropped amid easing monetary policy “albeit with a time lag,” while commercial banks? lending rates had also started to decline sharply.

Sri Lanka’s economy grew 1.8 percent year-on-year in the first half of 2009, dragged down by weak demand for clothing and tea.

“Policy easing, in addition to IMF tranche disbursals and the recent 500-million-dollar sovereign bond issuance, would encourage a much-needed ramp up in investment activity,” noted India-based Citibank economist, Anushka Shah.

The IMF has released nearly 600 million dollars to Sri Lanka after approving a 2.6-billion-dollar bailout package in July to help the island stave off its worst balance of payment crisis.

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