Aurelia Butler

COLOMBO (Reuters) – In a sign of confidence that the worst of Sri Lanka’s financial crisis is over, its central bank surprised markets by cutting interest rates for the first time in three years on Thursday, signalling a change of course to fuel a rebound in the economy. The South Asian island republic plunged into crisis last year as its foreign exchange reserves ran out, food and energy prices spiralled and protesting mobs forced the ouster of the country’s then president.President Ranil Wickremesinghe took the reins in July and negotiated a $2.9 billion bailout from the International Monetary Fund (IMF) in March.In an address to the nation on Thursday, Wickremesinghe said Sri Lanka will work to cut government spending, boost foreign investment and create jobs as the country seeks to return to growth. “The country’s economy is gradually recovering from the crisis, thanks to correct policies including the collective efforts of the people.”Wickremsinghe outlined multiple reform measures including increasing exports, attracting international investors and restructuring loss-making state enterprises to put public finances in order and return to country to growth. IMF Deputy Managing Director Kenji Okamura said on Thursday in a statement at the conclusion of his visit to Colombo that the country is showing a “strong commitment” to implementing economic reforms but must continue this momentum even in a challenging economic environment.Inflation, which hit a record high of around 70% in September, is coming down, government revenues are looking up and pressure on the country’s balance of payments is easing.The government aims to complete talks to restructure its bilateral debt with other countries by September.”This can possibly be seen as an end to the crisis,” said Sanjeewa Fernando, a senior vice president at Asia Securities in Colombo.The Central Bank of Sri Lanka (CBSL) cut its standing deposit facility rate and standing lending facility rate by 250 basis points to 13% and 14%, respectively, from 15.5% and 16.5%. The central bank said the big rate cut would “help steer the economy towards a rebound phase.”Governor P. Nandalal Weerasinghe said the economy “was getting back to normalcy”.”Coming out of the crisis is gradual,” he told reporters. “Cannot say yesterday, day before or tomorrow. It is a gradual recovery process.”While inflation has come down, it remains steep, so most analysts had expected the bank to keep rates steady. The rates are now at their lowest level since March 2022, the start of the crisis. The surprise decision was welcomed by markets, with the rupee rising to 288 against the dollar, its highest since April 2022 and the benchmark Colombo Stock Exchange index closing up 1.59%, lifting away from five-month lows. The rate cut comes after the key Colombo Consumer Price Index rose 25.2% on year in May compared with 35.3% in April, reducing some stress on the crisis-hit economy.The index peaked at a annual 69.8% surge in September last year. The national inflation rate was at 33.6% in April, easing from 73.7% in September.SHIFTING GEARSAnalysts said with the CBSL having successfully dealt with the runaway inflation, it was turning its attention to growth.The central bank raised rates by a record 950 basis points last year to tame inflation and by 100 bps on March 3 this year.The IMF expects gross domestic product to contract 3% this year after a 7.8% contraction last year. The CBSL has forecast a 2% contraction in 2023 and Weerasinghe said the bank expects the economy to grow from the third quarter onward after a small contraction in the second quarter.”Hopefully banks will gradually expand their loan books and credit will start flowing into businesses and with that the economy will start to recover,” Weerasinghe said.Inflation is expected to moderate further, with Fernando at Asia Securities predicting a figure of 5% by year end.The IMF has set Sri Lanka an inflation target of 15.2% for this year but the CBSL is eyeing a more ambitious target of single-digit inflation by September that was clearly within reach, Weerasinghe said. “Headline inflation is forecast to reach single-digit levels in early Q3 2023, and stabilise around mid-single digit levels over the medium term,” the bank said.It said faster deceleration of inflation and the lower probability of demand pressure during the economic rebound “creates space for a gradual policy relaxation in the period ahead.” More

A squeeze on budget shoppers has forced US discount retailer Dollar General to cut its sales forecast, sending its shares down 20 per cent in a sign of mounting pressures in the American economy. The store chain known for dollar-priced goods on Thursday predicted net sales growth in the range of 3.5-5 per cent in 2023, down from a previous estimate of between 5.5-6 per cent. “Our sales guidance assumes our customer will remain under pressure for the remainder of the year,” Kelly Dilts, chief financial officer, said on a call with investors. The weaker outlook comes as US consumers are increasingly stretched by months of persistent inflation. Nearly a third of US adults reported they were either “just getting by” or “finding it difficult to get by”, according to a survey taken in late 2022 that was released last week by the Federal Reserve. Higher inflation and depleted coronavirus pandemic savings have hit lower-income consumers, the core customers of retailers such as Dollar General. Rival Dollar Tree last week cut its profit outlook as it said that customer spending was shifting away from durable goods to lower-margin food. Dollar General also said that its core customers were spending more on low-margin essential items. At the same time, the company reported more customers with higher incomes coming through its doors. “While we have attracted and retained a significant number of customers in higher income brackets in recent years, our guidance does not assume a significant trade-in benefit for this year,” Dilts said, referring to the effects of a shift in customer income profiles. Dollar General reported net sales in the first quarter that ended May 5 increased 6.8 per cent to $9.3bn, missing analysts’ expectations for revenue of $9.46bn, as customer traffic declined and sales fell in apparel, home and seasonal categories. Among the economic drags on the company were lower tax refunds than customers expected, reductions in government food assistance payments and poor weather in March and April. “We believe the macro headwinds have had a disproportionate impact on our core customer,” chief executive Jeff Owen said. “We continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point.”

Same-store sales, which strip out the effects of new store openings, increased only 1.6 per cent in the quarter. Owen said on a call with investors that same-store sales declined 2 per cent in April, with the weak trend continuing into May. Dollar General cut capital spending plans for the fiscal year and will only open 990 new stores instead of the previously planned 1,050. The company now expects same-store sales growth to be in the range of about 1-2 per cent for the fiscal year, compared with previous expectations between 3 -3.5 per cent. Earnings per diluted share are expected to range from no change to a decline of 8 per cent this year, compared with previous guidance of growth of 4-6 per cent. More

“The increases in interest rates that we still have to do are relatively marginal, most of the work has been done,” said Villeroy, who was speaking at an event hosted by various French media organisations and the Toulouse School of Economics.Data published earlier on Thursday showed that euro zone inflation had eased by more than expected last month, fuelling a debate about the need for further ECB rate hikes beyond an increase later this month.Inflation in the 20 nations sharing the euro eased to 6.1% in May from 7.0% in April, below expectations for 6.3% in a Reuters poll of economists.ECB President Christine Lagarde added on Thursday that euro zone inflation was still too high, so further monetary policy tightening from the ECB was necessary even if there is a growing body of evidence that past rate hikes are staring to work. More