* C.bank cuts rates for second time in 4 months
* C.bank to impose bank lending rate cap if borrowing costsnotreduced
* Growth in 2019 projected at 3.1% - cenbank chief
* Economy in Q2 likely to have expanded at 2.1%(Adds cenbank chief comments)
By Shihar Aneez
COLOMBO, Aug 23 (Reuters) - Sri Lanka's central bankunexpectedly cut interest rates for the second time in fourmonths on Friday to boost sluggish growth after tourism andinvestments plummeted following deadly Easter Day bomb attacksby Islamist militants.
It also warned banks that it would put caps on their lendingrates if they failed to reduce borrowing costs for businessesand individuals.
The Central Bank of Sri Lanka (CBSL) slashed the standingdeposit facility rate (SDFR) and standing lending facility rate(SLFR) by 50 basis points (bps) to 7.00% and 8.00%,respectively. A Reuters poll had expected the bank to keep bothrates steady.
It had cut rates a similar amount in May to support theeconomy after the attacks.
The latest cut also comes ahead of a presidential electionlater this year.
Economic growth had already slowed to a 17-year low of3.2%in 2018 and central bank chief Indrajit Coomaraswamy said onFriday it is expected to dip to 3.1% this year. A Reuters pollhas predicted growth will be its lowest in nearly two decadesthis year.
"Although economic growth is expected to recover graduallytowards its potential in the medium term, domestic and globalheadwinds are likely to delay this recovery," the central banksaid in its monetary policy statement.
"Therefore, it is essential that the available policy spacesare utilised to support productive economic activity withoutdisrupting the improvements achieved in relation tomacroeconomic stability."
Coomaraswamy said initial indications showed growth in thesecond quarter was 2.1 percent.
The tourism sector, Sri Lanka's third-largest source offoreign currency, was badly hit by the April 21 attacks byIslamist militants that killed more than 250 people.
LENDING RATE CAP
Addressing concerns that commercial banks have been slow topass on earlier rate cuts, Coomaraswamy told a news conference:"We will go with individual lending rate caps for banks if thelending rates do not come down on a specific time limit.”
Market rates were already on the decline but the warningmight make them come down faster, said Danushka Samarasinghe,CEO at Softlogic Capital Markets.
"This will boost economic activity ahead of the election.However, the concern is this move will lead to foreign outflowsand will weaken the rupee as a result."
Capital Economics said Friday's rate cut is likely to be thelast for 2019.
"The main reason being that the currency is likely to comeunder renewed pressure," it said in a research note.
"Sri Lanka's poor external position means that the rupee isexposed to sudden shifts in investor sentiment and its highlevel of foreign currency denominated debt means that the CBSLcannot afford to let the rupee depreciate too much," it added.
Pressure on the rupee has been building since earlythis month as foreign investors started to pull out funds inline with outflows from other emerging markets.
The rupee fell 0.3% to touch 180.00/05 per dollar and themain stock index closed 0.11% weaker after the rate cut.
"The pressure on the rupee will build up with a lag effect,but if the economy picks up, the pressure on the rupee couldease," said a currency dealer.
The government's finances remain under pressure with a heavyexternal debt repayment schedule between 2019 and 2022.(Reporting by Shihar Aneez; Editing by Simon Cameron-Moore andDarren Schuettler)