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Sri Lanka central bank keeps policy rates on hold, as expected

Credit: REUTERS/DINUKA LIYANAWATTE

Sri Lanka's central bank left its key interest rates unchanged on Friday, as widely expected, two days after the new government announced major tax cuts to boost economic growth that has fallen to a near two-decade low.

By Shihar Aneez and Ranga Sirilal

COLOMBO, Nov 29 (Reuters) - Sri Lanka's central bank left its key interest rates unchanged on Friday, as widely expected, two days after the new government announced major tax cuts to boost economic growth that has fallen to a near two-decade low.

The government this week announced value-added tax would be cut to 8% from 15% with effect from Dec. 1, while also unveiling plans to abolish some other taxes.

A Reuters poll had expected the Central Bank of Sri Lanka to keep its rates steady, so there was little surprise that the standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) were held at 7.00% and 8.00%, respectively.

"Economic growth is predicted to be modest during the remainder of the year, with likely sub-par growth in industry and services activities as implied by leading indicators," the central bank said in its policy review statement.

"However, improved investor confidence, supported by political stability and fiscal stimulus driven boost to aggregate demand, is expected to drive short term growth."

The central bank has cut rates by 100 basis points in two meetings since May to bolster the economy after the deadly Easter Day bomb attacks by Islamist militants.

The newly elected president, Gotabaya Rajapaksa, has promised to boost annual growth to 6.5% in his election manifesto, compared to a 17-year low of 3.2% growth last year.

Investor sentiment has been positive toward Rajapaksa, a former wartime defence chief who has pledged to secure the country against militant threats following devastating Easter bombings this year.

Other policy measures include imposing caps on rupee deposit interest rates, enabling banks to reduce the cost of mobilising funds from the general public.

As a result, the commercial banks' average weighted prime lending rate (AWPR) fell 62 basis points between the last rate cut in August and Nov. 22.

"There wont be huge reaction from the markets as the decision was widely expected. With the low credit growth we will see very low GDP. But since the government reduced the taxes we expect the economic activities to pick up," Dimantha Mathew, head of research at broker First Capital Holdings.

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Simon Cameron-Moore)

((shihar.aneez@thomsonreuters.com; +94-11-232-5540; Reuters Messaging: shihar.aneez.thomsonreuters.com@reuters.net twitter:@shiharaneez))

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