CBSL to Anchor Rates Steady – First Capital
The Central bank of Sri Lanka (CBSL) may consider to maintain same policy stance in this week (19th) monetary policy review as well, but given the concerns around economic growth, there is a considerable low probability that CBSL is likely to further ease its policy rates, the research arm of the Sri Lanka’s First Capital group stated in its May pre-policy analysis research note.
“As per our view, CBSL either can choose to hold policy rates steady or cut by 25bps or 50bps while, hike is off the table due to the lackluster economic growth. We believe that there is a significant (90% probability) to hold rates due to the considerable improvement in high frequency indicators and with fiscal and monetary measures implemented so far,” First Capital stated. “However, there is a 5% probability each for 25bps and 50bps rate cut to support economic growth,” It also stated that towards the second half of this year they expect a probability for a rate hike in order to prevent overheating of the economy amidst the given fiscal and monetary stimulus.
Arguments against further relaxation in monetary policy According to First Capital, private credit, one of the key gauges of the economy, increased by Rs 112.2 Bn in March 2021 recording a growth for the 8th consecutive month indicating a revival in gross loan disbursements. Growth reflects that both businesses and individuals are speeding-up economic activities.
CBSL has set a target of 14% to grow private sector credit while year to date (YTD) credit growth figure of 2.57%, nearly marks an achievement of one quarter of the total credit earmarked for the entire year, indicative of that the full year target is within the reach. Despite the fact that third wave may create a temporary slowdown, low interest rates are expected to be a sweetener to propel the demand for private credit in 2021. CBSL continued to infuse ample liquidity into the banking system via increased CBSL Holdings which also supports fiscal shortage. Despite the volatilities, liquidity continued to remain in the positive territory and remained above Rs 100.0B n since 19 April 2021.
In contrast to the detrimental impact witnessed last year amidst 1st wave of COVID-19 and the complete lock down, the impact of the 3rd wave appears to be lesser as the Government rules out complete lockdown to ensure that economy heals with minimal scarring. Moreover, rejuvenation of the vaccination programme and better preparation are expected to bolster the economic sentiment, despite a temporary slowdown expected in 2Q 2021. Elaborating their arguments against further relaxation in monetary policy, First Capital stated that “Further low interest rates to pose negative implications on exchange and lower interest rates have a negative impact on the exchange rate as it can cause to lose foreign capital causing the exchange rate to decline.
Despite the import restrictions, YTD USD: Sri Lankan rupee has plunged by 6.3% to Rs 197.2 against the greenback and further rate cuts could lead to a plunge in foreign exchange. Therefore, in order to preserve the foreign currency which is considered to be the talk of the town, further rate cuts are unlikely”, it stated.