The Central Bank of Sri Lanka is expected to cut key interest rates at its monetary policy meeting today, with First Capital Research (FCR) assigning a 60% probability for a rate reduction.
FCR predicts a 50% chance of a 25-basis-point cut and a 10% chance of a deeper 50-basis-point cut, while noting a 40% likelihood of rates being held steady to assess ongoing domestic and global developments.
The Central Bank’s policy decision is scheduled to be announced tomorrow 23rd of July.
FCR stated that further rate cuts could offer stimulus to an economy facing signs of slowing growth, subdued inflation, and limited government spending.
Despite year-on-year GDP growth of 4.8% in the first quarter of 2025, total consumption dropped 7.9% quarter-on-quarter, while capital expenditure remained far below budget allocations.
FCR expects the Statutory Reserve Ratio (SRR) to remain unchanged with an 80% probability, though there’s a 20% chance of a 100-basis-point hike due to improved liquidity.
May 2025 saw Rs.187.2 billion in credit growth, largely from the private sector, but overall credit expansion for the year remains modest at 2%, leaving room for further growth without risk of overheating.
FCR warned that a premature rate cut could weaken private credit momentum, especially as treasury bill yields remain sticky and banks prefer government securities over private lending.
The report also highlighted concerns about foreign reserve pressures, with reserves dropping to US$6.1 billion in June and further outflows of US$422 million expected by October.
Inflation was recorded at -0.6% in June, and while the economy benefits from low price pressures now, rising inflation and taxes could reduce disposable income in the months ahead.
At the previous policy meeting on May 21, the Central Bank cut both the Standing Deposit and Lending Facility Rates by 25 basis points to 7.75%, aiming to align inflation with the 5% target and support recovery.
