A latest First Capital Research report says despite the 50bps rate cuts each in May and August; the door is open for a rate cut considering the need to address the sluggishness in economic activity.
“The external outlook favouring Sri Lanka, easing political uncertainty and positive macro environment provides, opportunity for monetary easing despite the risk in lower liquidity position. Accordingly, we do not rule out a possibility of a rate cut though at a lower probability of 40%. We are more biased towards a rate cut in December 2019 considering the risk in lower liquidity position.
The First Capital pre policy analysis report says, “In line with our expectation, CBSL, maintained its policy rates at current levels as they believed that private sector credit may pick gradually and also there is ample space for market lending rates to adjust downwards in response to the policy measures taken to address the sub par economic growth which was affected by Easter Sunday attacks.”
“Although in our previous report dated October 7 we mentioned that there will be no more policy changes for 2019 we are revising our stance considering the recent changes in the political and economical landscape of the country and external outlook for Sri Lanka.”
Analysing the surprise Fed rate cut leads another round of global easing, the report said “Fed in late October 2019 cut benchmark overnight lending rate a quarter point to a range of 1.50%-1.75%, the 3rd such move in 2019 while most of the committee members saw the moves as enough to support the outlook of moderate growth. Following US’s Fed move, China, Thailand and Gulf countries also joined a round of monetary easing (see slide 04). The global move towards easing monetary policy, creates a supportive environment for SL to provide further easing in the domestic economy.”
First Capital believes, Strengthening macroeconomic indicators and the current high yields has been slowly attracting foreign inflows which is likely to further accelerate post Presidential Election amid easing political uncertainty to a certain extent.
With the support of foreign inflows, currency has been strengthening over the past couple of weeks. We believe a significantly undervalued rupee (as indicated by the REER) and lower credit growth, provides room for CBSL to buy dollars, strengthening the reserves and increasing liquidity in the system.
Sri Lanka’s external position looks comfortable near-term, with foreign reserves at USD 7.8 bn as at October 2019 and the improved current account position. The Central Bank plans to raise a Samurai bond of USD 500 million in December 2019, further adding cushion to the foreign reserves. “We expect reserves to hover comfortably around USD 8 billion mark with sufficient foreign repayment cover during the rest of 2019. Accordingly, we expect the comfortable position in the external sector to exert lower pressure on reserves.”
Post Easter Sunday attacks, Sri Lanka’s GDP growth for 2Q2019 slowed down to 1.6%. We expect GDP growth to gradually improve with lower interest rates and the election season. Private sector credit growth continues to remains negligible with January to September 2019 growth at 2.13%.
Despite CBSL cutting rates in August 2019 for the second time, the decline in interest rates has been slow amid the high level of NPLs in the system forcing CBSL to introduce lending caps to banks.
Post completion of the Presidential Election business activity and credit growth has shown slow progress but continues to remain below expectations calling for further monetary easing, the report said.
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