First Capital predicts monetary policy rate cuts
First Capital Research stated it expects a major rate cut to be implemented at the next meeting of the CBSL’s Monetary Board, owing to the effects of the COVID-19 pandemic.
At the Monetary Board’s previous meeting on 5 March, CBSL held policy rates steady to allow time for previous policy actions to take effect. However, to provide relief from the economic impacts of COVID-19, CBSL was forced to implement emergency reductions to policy rates on three occasions, bringing the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) to 5.50 per cent and 6.50 per cent, respectively.
The CBSL also recently reduced the Statutory Reserves Ratio (SRR) by 2 per cent, pushing the liquidity position over Rs 200 billion, in an effort to encourage banks to offer low -interest loans to individuals and businesses affected by the pandemic.
However, as pointed out by First Capital, as well as several other analysts, banks are not likely to allocate these funds towards lending, and are expected to instead park this excess liquidity under the CBSL’s SDFR facility at 5.50 per cent interest.
First Capital expects the CBSL to discourage this through a major rate cut to the SDFR, making this option less attractive to banks and pushing them towards its original intent to increase lending. It stated that the reduction in policy rates would be one of CBSL’s main tools in increasing economic activity and spurring its revival.