Pre-Policy Analysis: CBSL to hold policy rates steady?
The Research arm of the First Capital (FC) group predicts a 50 per cent possibility in changing its policy interest rates at the Central Bank of Sri Lanka (CBSL)’s next Monetary Board meeting on the 25 November.
“As per our view, CBSL either can choose to hold policy rates steady or cut by a 25bps or 50bps, while hike is off the table due to the lackluster economic growth,” they stated.
FC believes that there is a 50% probability to hold rates due to improvement in high frequency indicators. Moreover, there is a 25% probability for 25bps and 50 bps respectively to support economic growth.
They believe that there is a 50% probability for policy rates to remain unchanged due to improvement in high frequency indicators.
“Considering the reduction of Statutory Reserve Requirement (SRR) by 300bps in two instances to 2% we expect SRR to remain unchanged at same levels.
As a response to the measures taken by the Government, private sector credit has improved to LKR 87.4 billion in September while the market liquidity has reached LKR 140 billion by 13 November indicating that there is surplus liquidity in the system.
Moreover, the unemployment rate, which was at 5.7% in the 1Q2020 has declined to 5.4% in the second quarter. These indicators suggest that economic activity has remained steady without much deterioration in the 2Q, FC said.
It added, “Except the GDP growth numbers, where the 2Q2020 figures are yet to be seen, other indicators are signifying a recovery, inquiring the need of further policy easing at the upcoming review.
Considering the encounters faced by the businesses and individuals due to the second wave of COVID-19, CBSL has extended the debt moratorium for another period of six months commencing from 1 October 2020. We believe that the extension of moratorium is one of the relief packages offered by the CBSL for individuals/businesses to revive their business activities.
“In response to previous monetary easing measures implemented by CBSL, to bring down costs of borrowing of businesses and households, both market deposit and lending rates adjusted notably so far during the year. Average Weighted Prime Lending Rate or AWPR declined to historic lows in recent weeks, while banks’ lending rates also witnessed a downward adjustment in line with CBSL’s expectations.”
Therefore, FC believe that considering the recovery in the private credit and historic low levels in AWPR, there is no vital requirement for CBSL to provide a rate cut and to further bring down the market lending rates drastically.