Private sector credit increased by Rs 134 billion in August 2021 indicating a sign of strong acceleration amidst continual support from monetary stimulus.
Despite significant quantitative easing strategies liquidity continues on the negative ground. YTD growth stands at 10.1% broadly slightly above First Capital Research (FCR) expectation of 12% for 2021 as YoY growth rises above 14%.
“With the Average Weighted Prime Lending Rate (AWPR) remaining on low ground and liquidity negative, further tightening is likely to slow credit growth and improve the liquidity position,” According to FCR pre-policy Analysis October. The FCR report also noted that the Sri Lankan economy is likely to grow at a much slower pace in the 3Q2021 compared with the 2Q2021 due to the COVID-19 virus-induced restrictions on economic activities. Sri Lanka’s economy grew at a robust 12.3% in the 2Q2021 resulting in an extremely low base of 16.4% in 2Q2020 due to 1st wave lockdown, which resulted in the complete closing of the economy. CBSL holdings rose to Rs 1,442.8 billion on October 7, 2021, from 1,174.2 billion as of August 19, 2021. We believe CBSL’s continuance in quantitative easing strategy may delay further policy rate hikes.
“We consider that a rate hike may support CBSL in raising additional funding via Government Securities. Continuous rapid climb in Government Securities secondary market rates.” The FCR report also highlights that despite the import restriction, imports have been on a rising trend, expanding the trade deficit compared to the previous year for the 5th consecutive month in July 2021.
“Further relaxing import restrictions may also fuel consumer demand leading to further depletion in foreign reserves adversely impacting the exchange rate. Therefore, to preserve the foreign reserves which are considered to be the talk of the town, there is a possibility of a rate hike. Relaxing import restrictions may further add pressure on the exchange rate,” the report said.
FCR believes that CBSL may consider maintaining the same policy stance in this policy review but given the considerable improvement in high-frequency indicators to prevent an overheating of the economy, there is a considerably high probability (30%) that CBSL may hike its policy rates. “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 to prevent overheating of the economy amidst the given fiscal and monetary stimulus.” As per our view, CBSL either can choose to hold policy rates steady or hike by 25bps or 50bps 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 significant probability (70%) to hold rates due to the considerable improvement in high-frequency indicators with the fiscal and monetary measures implemented so far. However, there is a 30% probability for a 25bps/50bps rate hike to balance external pressure.”
Add new comment