‘Rates to hold; CBSL assures liquidity as economy rebounds’ | Daily News

‘Rates to hold; CBSL assures liquidity as economy rebounds’

The Central Bank of Sri Lanka (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 according to First Capital ResearchPre -policy Analysis.

“We believe that there is a 70% probability to hold rates due to the considerable improvement in high frequency indicators and with fiscal and monetary measures implemented so far. However, there is a 15% probability each for 25bps and 50bps rate cut to support economic growth.”

First Capital Research estimates the Sri Lanka’s GDP would recover to 3.2% in 2021, from its expected steepest contraction in the history of -5.8% in 2020. Lack of demand for credit, slowness in consumer demand recovery and import restrictions can be considered as a major factor favouring to ease the policy rates at the upcoming meeting.

In-line with First Capital expectations, at the previous policy meeting held on January 2021, CBSL maintained its monetary policy stance, after considering the macroeconomic conditions and expected developments on the domestic and global fronts.

The Board, having noted the reduction in overall market lending rates during 2020, stressed the need for a continued downward adjustment in lending rates to boost economic growth in the absence of demand driven inflationary pressures, particularly considering the significant levels of excess liquidity prevailing in the domestic money market.

Manufacturing and Service Purchasing Managers’ Index (PMI) remained in expansion territory in January 2021. New business activity in PMI increased in January 2021, particularly with the improvements observed in financial services, transportation, and wholesale and retail trade sub-sectors.

Private sector credit increased by LKR 25.7Bn in January 2021 recording a growth for the 6 th consecutive month indicating a revival in gross loan disbursements. Growth reflects that both businesses and individuals are speeding-up economic activities.

CBSL continues infusing ample liquidity into the banking system via increased CBSL Holdings (Money Printing) which also support fiscal shortage. The CBSL Holdings rose to LKR 809.9Bn on 26th February 2021 from LKR 738.4Bn as at 31st December 2020.

Yields in the secondary market witnessed an increase with moderate market activity from participants followed by a wait and see approach amidst the looming uncertainty. The last 2 Bond auctions and 5 Bill auctions were undersubscribed by a considerable amount reflecting the lack of clarity among market participants with the current economic condition. We consider a rate cut would be required to sustain the secondary market rate at lower level.