Sri Lanka’s central bank kept its benchmark interest rates unchanged for a seventh month, taking advantage of low inflation to accelerate economic growth.

The Central Bank of Sri Lanka left the reverse repurchase rate at 9.75 percent, the lowest level since August 2005, and the repurchase rate at 7.5 percent, according to a statement on the Colombo-based bank’s website today.

Inflation in Sri Lanka has slowed to less than half the average rate of the five years through 2009 as farm supplies increased after the government recovered land from the rebel Tamil Tiger-controlled areas. Low prices are also giving Governor Nivard Cabraal room to assess the impact of Europe’s debt crisis on the country’s exports.

“Sri Lanka’s modest inflation gives the central bank space to keep rates steady and gauge how the concerns over Europe pan out,” Bimanee Meepagala, an analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund, said before the announcement.

The yield on the five-year government bond fell 3 basis points to 10.12 percent at 9:15 a.m. local time, according to Commercial Bank of Ceylon Plc. The Sri Lankan rupee, which has gained about 1.4 percent since the civil war ended in May 2009, was at 113.50 per dollar compared with 113.55 yesterday.

‘Subdued’ Inflation

“Inflationary pressures in the domestic economy remain subdued, benefiting from dampened commodity prices in the international market and increased domestic agricultural output,” the central bank said in the statement.

Consumer prices in the capital, Colombo, rose 5.3 percent in May from a year earlier after climbing 5.8 percent in April. Inflation averaged 12.6 percent in the five years through 2009.

Low borrowing costs will bolster local consumer demand as exports, which make up about a fifth of Sri Lanka’s $41 billion economy, may be hurt by Europe’s debt problems, NDB’s Meepagala said.

Sri Lanka follows Australia, South Korea, Indonesia, the Philippines and Thailand in keeping rates unchanged this month.

Cabraal said June 10 gross domestic product may grow 7 percent in 2010, the fastest pace since 2006 and up from an April estimate of 6.5 percent.

Economic expansion will gather momentum by the “prevailing supportive monetary conditions,” the bank said.

Growth will also get a boost from President Mahinda Rajapaksa’s plan to spend $1 billion annually on ports, roads and power plants to reintegrate war-hit areas.

Sri Lanka’s growth prospects are attracting foreign investments. Bharti Airtel Ltd., India’s largest mobile-phone operator, unveiled plans this month to expand services in the nation.

Source-Bloomberg