The interest rate cut by the US Federal Reserve (Fed) will go well for Sri Lanka which is desperately looking for more export opportunities and the flow of foreign investments to the country, economists said.
“When there is a rate cut, especially of this magnitude, consumption in the US will increase triggering more imports from the world. The US is a major importer of Sri Lankan garments and this would be an opportunity for garment and other exporters to capitalise. If exporters could fill that gap they will certainly gain from the rate cut,” Former Central Bank Deputy Governor W.A. Wijewardena said.
The US Federal Reserve, under intense pressure to stimulate the economy, made its first interest rate cut in over a decade last week but struggled to justify the move or explain where it goes next.
The move to ease the cost of borrowing was well telegraphed as meant to ‘insure’ against risks washing onto American shores from abroad but financial markets were whipsawed by confusion over whether another cut would be coming.
According to financial analysts on a 25 basis point cut in the rate is a huge decline in the interest rate. Fed Chair Jerome Powell told reporters he remains confident in the American economy and sees no sectors ready to go ‘bust’ but decided on a 25 basis point cut in the rate to “insure against downside risks from weak global growth and trade policy uncertainty, to help offset the effects these factors are having on the economy.”
“Sri Lanka gets hot money when there is an interest rate reduction in other markets which do not look attractive to investors. We experienced outflows of funds invested in government securities resulting in the decline of funds from about US$ 4.5 billion in 2015 to around less than US$ 1 billion now.
The rate cut in US will make more attractive for investments helping us to reduce borrowings,’ Wijewardena said.The target for the federal funds rate is now 2.0-2.25 percent and the central bank vowed to “act as appropriate to sustain the expansion.”
It was a quick turnaround for the Fed, coming after four rate increases last year – the last one in December.
But Powell tried to paint it as part of a continuum, with central bankers shifting their policy stance as economic data changed over the course of the year, especially trade tensions, which nearly “boiled over” last month but have now returned “to a simmer.”