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100bps rate cut on the cards to push banks for lending: First Capital Research

Jun 19, 2020 (LBO) – First Capital Research allocates a policy rate cut expectation of 100bps bringing the SDFR and SLFR to 4.50% and 5.50%, respectively.

Despite prevailing the low-interest-rate environment it will have a ripple effect on the overall economy, First Capital Research said in a new research note.

"We believe that the Central Bank is yet again in a vulnerable position and the possibility of a policy rate cut is on the cards in order to push banks to consider the lending opportunities," First Capital Research said.

According to First Capital Research, the Central Bank presumes the excess liquidity may factor in as a stimulus for LCB’s to lend to businesses in support of the government’s efforts to revive the economy.

"On the contrary, LCB’s may expedite this as an opportunity to position in either short term treasury instruments or under SDF facility interest rate deriving a substantial interest on the deposit," First Capital Research said.

"Thereby, the possibility exists that bulk of the money may not move into the revival of businesses via credit schemes, therefore, the intention of CBSL may not materialize."

On 16th Jun 2020 CBSL reduced SSR by 200 bps from 4% to 2%. The reduction is expected to release over LKR 115 Bn of liquidity into the banking system, allowing banks to accelerate credit flows into the economy while reducing the cost of funds.

"We expect LKR 100 Bn top up, in the existing refinance scheme which may enhance additional liquidity to the domestic money market above LKR 250 Bn," First Capital Research said.

"At the current level of LKR 221 Bn (17th Jun) excess liquidity is already at a 16 year high. Further top up in existing refinance scheme may push CBSL Holding (printed money) closer to LKR 500 Bn from current LKR 317 Bn."

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