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Friday, July 9, 2010

Sri Lanka Unexpectedly Cuts Rates to Support Growth (Update1)

By Anusha Ondaatjie

July 9 (Bloomberg) -- Sri Lanka’s central bank unexpectedly cut its benchmark interest rates for the first time in eight months to support economic growth after the European Union withdrew trade concessions this week.

Governor Ajith Nivard Cabraal has room to keep borrowing costs low as higher farm supplies helped slow inflation in June for a fourth month. The EU on July 5 announced it will temporarily deny preferential trade access to Sri Lanka from Aug. 15, saying the country failed to respond to European pleas to improve its human rights record. Sri Lankan exports make up about a fifth of the island’s $41 billion economy.

“The government wants to step up growth as risks to exports emerge,” said Saminda Weerasinghe, a research manager at Acuity Stockbrokers Pvt. in Colombo. “Inflation is under control and that helps boost consumer demand.”

The monetary policy decision was announced after the nation’s financial markets closed. Sri Lanka’s benchmark Colombo All-Share Index fell 0.4 percent to 4,505.69 today. It has climbed 33 percent this year and is the best performer after Mongolia and Bangladesh in Asia Pacific. The Sri Lankan rupee was little changed at 113.43 against the dollar.

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The Sri Lankan central bank’s move contrasts with counterparts in South Korea, India, Malaysia and Taiwan, which raised rates in recent weeks as Asia led the global economic recovery.

Weerasinghe said Sri Lanka needs low borrowing costs to rebuild war-torn northern and eastern parts of the country after the Liberation Tigers of Tamil Eelam rebels were defeated in May 2009, ending a 26-year separatist struggle in the country.

Land recovered from the rebel-controlled areas has enabled farmers to expand cultivation, driving down the inflation rate in the Indian Ocean island to less than half the average pace of the five years through 2009.

Paddy production in the September-to-March season rose 9 percent to an unprecedented 2.6 million tons, according to the statistics department.

Consumer prices in the capital, Colombo, rose 4.8 percent in June from a year earlier after gaining 5.3 percent in May.

Sri Lanka is aiming to accelerate growth to 7 percent in 2010, the fastest pace since 2006, to cut poverty in a country where the World Bank estimates almost half the population lives on less than $2 a day.

Prospects of faster growth are attracting overseas companies to Sri Lanka.

HSBC Holdings Plc opened the first branch by any foreign bank in Jaffna, the former stronghold of the Tamil Tigers, while Minor International Pcl, Thailand’s biggest hotel operator, announced plans in May to invest in Sri Lanka to tap growing leisure and business travelers.

source - http://www.businessweek.com