CBSL to Steer Towards a More Hawkish Direction – FC Research
The Research arm of the First Capital group in its pre –policy commentary stated that the Central Bank of Sri Lanka (CBSL) may consider tightening the monetary policy rates in this policy review but given the concerns over economic growth, there is a considerable probability of 50% for CBSL to maintain its policy stance at current levels.
“With high frequent indicators improving in line with expectations, we have eliminated any probability of a rate cut. We expect a continued increase in probability for a rate hike in order to prevent overheating of the economy amidst the given fiscal and monetary stimulus” they stated.
As per their view, CBSL in its next (November 24), meeting of the Monetary Board either can choose to hike policy rates by 25bps or 50bps or hold policy rates steady, while a rate cut is off the table due to the high debt repayment and the high domestic borrowing requirement.
“We believe that there is a 50% probability for a rate hike due to the remedial action required to achieve external stability. However, there is also a 50% probability to maintain the policy rates at its current level, given the notable improvement in the high frequency indicators” it said.
Global Central Banks are trending towards tighter monetary policies as inflation leaps sky-high.
Analysis of upcoming policy decision on 25 Nov
Arguments for hike – 50%
The following factors ‘argue’ to hike rate at the upcoming policy meeting.
- Sovereign downgrades ensued from depletion of foreign reserves urges economic stability
- Liquidity dwindling requires a solid remedy amidst revival in private credit growth
- Relaxing import restrictions may further trigger pressure on currency
- Trending hawkish move in the global context
Arguments against hike – 50%
The following factors ‘argue’ that there is no requirement of hike in the policy rates.
- GDP growth needs further acceleration
- Ease pressure on Government Securities
- Cost push inflation cannot be addressed via monetary tightening