In a surprise move, the Central Bank of Sri Lanka (CBSL) cut its reverse repo rate earlier today. Inflation has continued to slow while market interest rates have not come down as much as was anticipated in response to the last policy rate cut in early July. Inflation is unlikely to become a threat any time soon which means that a further easing of monetary policy cannot be ruled out for the near term. However, the local economic upswing looks set to stay strong and we judge it most probable that policy rates will now stay on a prolonged hold, before eventually moving up in 2011.
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