COLOMBO - Sri Lanka's central bank cut interest rates by 25 basis points on Wednesday in a surprise decision aimed at helping fuel the South Asian nation's economic recovery from its worst financial crisis in decades.

It said it took the decision "in the absence of significant inflationary pressure" and that it expects inflation to remain below its 5 percent target in the medium term.

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The Central Bank of Sri Lanka (CBSL) cut the Standing Deposit Facility Rate to 8.25 percentand the Standing Lending Facility Rate to 9.25 percent, it said in a statement.

Nine out of 14 economists and analysts polled by Reuters had predicted the monetary authority would keep interest rates unchanged to hedge against political uncertainty. The others in the poll had forecast cuts.

"The board underscored the need to signal its desire to continue eased monetary conditions to sustain the revival of economic activity towards the full potential, in the absence of significant inflationary pressures," the CBSL said.

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The central bank cut rates by 50 basis points in March in an easing cycle that has seen rates drop by 7.25 percentage points since June 2023, partially reversing 10.50 percentage points of increases since April 2022 when the island was battling a collapse in the economy.

Sri Lanka's economy is expected to grow 3 percent in 2024, helped by a $2.9 billion IMF lending programme. The economy shrank 7.3 percent  in 2022 and 2.3 percent  last year.

Inflation dropped to 1.7 percent  in June, a sharp contrast to 70 percent  in September 2022 during the height of the financial crisis.

Sri Lanka cut power tariffs by 22.5 percent  and reduced fuel and cooking gas prices this month to reduce living costs, which analysts said would also dovetail with CBSL's growth push.

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"They have used the technical situation of inflation remaining below the bottom range of the inflation target, which is now reinforced by the electricity tariff cut, to cut rates," said Thilina Panduwawala, head of research at Frontier Research.

"In addition, they hope the cut will help reinforce the pick up in private sector credit growth seen in May and June."