Sri Lanka cuts interest rates

Peace has brought on an economic recovery

Lower inflation in Sri Lanka has paved the way for a cut in interest rates, as peace talks encourage an economic recovery in the country.

Sri Lanka's central bank has reduced the key interest rate by 75 basis points to 9%.

The reduction had been expected after the bank indicated it was looking to reduce rates further after a similar cut in November.

"The third quarter performance shows a revival of economic activity and indicates that if continued, the anticipated (full-year) growth rate could be higher than the published forecast of over 3%," the bank said in December.

Sri Lanka's economy emerged from its worst ever recession in 2002 after a 1.4% contraction in the previous year.

Peace dividend

A ceasefire signed in February last year, ending a two-decade long civil war, has turned around the country's fortunes.

A drought which crippled the agriculture sector and power shortages of up to six hours a day also added to the economic troubles in 2001.

Peace talks between the government and Tamil Tigers are currently being held in Thailand.

Foreign aid tied to a peace deal has been flowing in, including $70m in reconstruction aid in November and a World Bank loan in December.

The interest rate cut helped push the Colombo all-share index up 0.6% to 816.46 points.