Fallout from Pandemic prompts an unprecedented rate cut: FCR

Jun 30, 2020 (LBO) – First Capital Research (FCR) believes that there is a higher likelihood of 90% that CBSL may provide a rate cut to ensure the continued supply of credit at a low cost of funding.

The firm also believes that there is a probability of 40% for a 100bps rate cut to bring it closer towards the 4% special working capital lending rate and thus to discourage the LCBs from using the SDFR facility.

With the recent reduction of SRR additional LKR 115Bn of liquidity was injected into the banking system, allowing banks to accelerate credit flows into the economy while reducing cost of funds.

As a result of the injection of liquidity to the system, CBSL holdings recorded a significant increase of more than LKR 200Bn since 13th Mar 2020.

“We expect LKR 100Bn top up, in the existing refinance scheme which may enhance additional liquidity to the domestic money market above LKR 250Bn At the current level excess liquidity is already at a 16 year high,” First Capital said in a research note.

Further top-up in the existing refinance scheme may push CBSL Holding (printed money) closer to LKR 500Bn from current LKR 311Bn.

“To dissuade banks from keeping excess money with the CBSL without lending, we believe that the CBSL has to reduce its policy rates substantially both SDFR, the rate at which commercial banks can keep overnight liquidity with the CBSL, and the SLFR, as a stimulus to boost the credit growth.”

In order to discourage LCBs in using the facility of SDFR in order to park the excess liquidity CBSL also has two options available to restrict access to liquidity window, First Capital Research said.

Option 01: Limiting the frequency of access to the SDFR liquidity window
Option 02: Limiting the amount that can be parked through the Liquidity window