Sri Lanka's central bank cut its benchmark by 50 basis points to 7.00 percent, saying a downward adjustment to policy was "appropriate in order to stimulate domestic economic activity, particularly since inflation and inflationary pressures are at levels that do not pose any immediate risk to the economy."
The Central Bank of Sri Lanka, which last cut its rate in December after raising it twice earlier in the year, said it had become "somewhat concerned by the slower-than-expected pick-up in economic activity in the first few months of 2013 and has been of the view that there is now a need to stimulate the domestic economy, particularly in the light of the gradual moderation in headline inflation and subdued demand pressures in the economy."
The central bank added that there was greater space to change policy right now and a capacity to return to a higher growth path without fueling inflationary pressures.
In April, Sri Lanka's inflation rate fell to 6.4 percent from 7.5 percent and last month the bank said it expected inflation to remain at this level.
Core inflation eased to 6.1 percent in April, reflecting a sharp deceleration in monetary expansion which is also expected to keep demand pressures in check, auguring well for inflation, the bank said.
In the fourth quarter of last year, Sri Lanka's Gross Domestic Product expanded by 6.3 percent from the third quarter for an annual rise of 6.3 percent.
For the full year, the economy grew by 6.4 percent, but the central banks said indicators had pointed to moderation in economic activity in the first quarter of 2013 due to lower external demand.
In addition to cutting the repurchase rate to 7.0 percent, the central bank also cut the reverse repurchase rate to 9.0 percent and raised the reserve maintenance period of commercial banks to two weeks from one week to "offer greater flexibility to commercial banks in managing their liquidity."
The reserve ratio was maintained at 8.0 percent.