Considering the recent major Fiscal and Monetary policy changes, First Capital Research believes that current accommodative monetary policy stance is appropriate and that there is ample space for market lending rates to reduce without further adjustment in policy rates.
Already announced tax relief, and proposed moratorium on capital repayments of bank loans for the SME sector are likely to provide further impetus to the economy.
Accordingly, we assign a 80% probability for no change in policy rates in the upcoming policy announcement and expect policy rates to hold in the 1Q-2020. However, we assign a lower probability of 20% for a rate cut in January 2020 with the urgency to boost the revival of economic activities. We continue to maintain that SRR is likely to be remained at the current level. As an extension to the stimulus package previously granted, the Government took measures to remove DRL imposed on banks and NBFIs and revise downwards the corporate tax rates across all sectors. We expect the additional support given with the above measures to further enhance the growth in the economy.
Following a similar path to Fitch, S&P recently revised its rating outlook on the Sri Lanka sovereign credit to negative from stable on the view that larger-than-expected fiscal deficit and concerns over indebtedness. Despite the negative rating outlook revision, in line with our expectations, Sri Lanka’s government securities market witnessed a net inflow since the beginning of the year 2020 amounting to nearly Rs 5.5 billion and is expected to gradually improve during the 1Q 2020 with the settling of the political uncertainty to a certain extent.
Inflation to remain at low single digit levels and stabilise within 4-6% while market lending rates are expected to reduce further.
Inflation, as measured by CCPI accelerated in December 2019 to 4.8% YoY driven by the food inflation. However, we expect a gradual acceleration in inflation to continue in the first half primarily driven by the supply side shortage relating to food due to the floods in November. However, the inflation is only likely to rise to around 6% mark as tax cuts are expected to partially offset the food inflation.
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