First Capital (FC) Research’s pre-policy analysis for September 2017 highlights that GDP growth for 2Q of 2017 was better than expected as the economy grew by 4.0% YoY in the 2Q of 2017 with industrial and services activities recording higher growth rates of 5.2% YoY and 4.5% YoY respectively.
FC Research upgrades private sector credit growth for 2017 E to 16% from 14% amidst a possible pickup towards year end. In spite of a high private sector credit figure in June 2017 we believe overall credit is likely to continue to remain under check.
“We believe inflation will be upward towards October and beyond with the floods in May 2017 affecting the supply in the current growing season. As a result, there could be possible supply side shortages towards October and beyond but may continue to remain around the 6.0% mark throughout the year.”
Sri Lanka’s forex reserves rose to US$ 7.7 billion in August 2017 from US$ 6.7 biilion in July, helped by US$ 550 million syndicated loan and dollar purchases by the Central Bank of Sri Lanka (CBSL).
The CBSL had net purchased US$ 975 million from currency markets so far this year. FC Research believes Foreign Reserves are now at comfortable levels. During the last two months, the CBSL brought down its holding in Government Securities from Rs 138 billion to below Rs 60 billion as at Septemebr 21.
Economists said the CBSL will still pencil in three hikes for 2018, but with the first of those not projected until June, versus March in the CBSL’s previous set of forecasts. September 2017 survey shows the CBSL expects to raise policy rates in December 2017 and no further hikes are expected after December 2017 until after May 2018.
FC Research believes that considering the current economic conditions with better than expected GDP growth level and the considerable improvement in the economic health the current monetary policy is appropriate and no change is required.
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