The Sri Lanka Central Bank Reduces The Statutory Reserve Ratio By 200 Basis Points

The decision was made to permanently reduce the market liquidity deficit and inject liquidity into the banking system, the bank said in a statement.

It is anticipated that the action will inject approximately 200 billion rupees ($625 million) into the domestic money market and further reduce interest rates.

"This was extremely unanticipated, but the central bank has expressed reluctance regarding the decline of interest rates. This measure will address this issue, according to the director of research at First Capital, Dimantha Mathew.

In June and July, the central bank slashed interest rates by 450 basis points in response to a steep decline in inflation, which reached 6.3% last month.

Analysts predict that the yield rates on government securities, which are presently 13%-14%, will decline to 11% for one-year bonds and 12%-13% for five- and ten-year bonds.

Additionally, lower lending rates will stimulate sluggish growth.

"The central bank was also under pressure due to the sluggish economic recovery, so this primarily addresses the growth issue," Mathew added.

The Sri Lankan economy contracted by 7.8% in 2018 and is projected to contract by 2% in 2023.

Prior to this, the monetary authority had warned that it would also take administrative measures to lower interest rates if commercial banks were slow to pass along the rate reduction to the market, but it has not provided a timeline.

Last year, the Sri Lanka Central Bank increased interest rates by a record 950 basis points to combat soaring inflation, and by 100 basis points on March 3 as the nation faced its worst financial crisis in decades.