50-pct probability for policy rates to remain unchanged: First Capital Research

Oct 16, 2020 (LBO) – First Capital Research (FCR) believes that there is a 50 percent probability for policy rates to remain unchanged due to improvement in high-frequency indicators.

“As per our view, CBSL either can choose to hold policy rates steady or cut by a 25 bps or 50 bps while a hike is off the table due to the lackluster economic growth,” First Capital said in a research note.

“We believe that there is a 50 probability to hold rates due to improvement in high-frequency indicators. Moreover, there is a 25 probability for 25 bps and 50 bps respectively to support economic growth. Considering the reduction of SRR by 300 bps in two instances to 2 percent we expect SRR to remain unchanged at same levels.”

Arguments against further easing | 50%

  • Domestic financial conditions have eased substantially with liquidity
    remaining in surplus
  • Improvement in high-frequency indicators in the economy
  • Credit to the private sector reflects a gradual normalization

Arguments for further easing | 50%

  • GDP growth in 2020E is expected to remain in the negative territory
  • Consumer confidence remain muted with weak demand
  • Govt. leans heavily on domestic source of funding