First Capital assigns higher probability for neutral monetary policy stance

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Aug 20, 2019 (LBO) – Sri Lanka’s First Capital Research believes that the Central Bank may delay the monetary easing while allowing the impact of the previous rate cut to materialise.

With manufacturing and credit signaling signs of recovery in economy and vulnerabilities affecting the external outlook, they assign a higher probability of 70 percent for a neutral policy stance at the upcoming policy meeting.

“Considering the slowness in the revival of economic growth, we would not rule out a possible lending rate cut though presently at a lower probability,” the research arm said.

“Thereby, we maintain our Aug 2019 expectation of a 30 probability for a 25 bps rate cut for the SLFR as mentioned in our previous report. However, we are more biased for a rate cut towards 4Q 2019.”

First Capital Research says activities in the economy has been improved although at a slower pace while credit growth and lending slightly picking up in June.

Although, lower US rates and eased monetary conditions worldwide was expected to assist Sri Lanka in attracting more foreign inflows, heavy foreign outflows have occurred in the recent 2 weeks with dollar bonds and rupee bonds spiking across the yield curve.

Global trade tensions and heightened political uncertainties due to the upcoming elections are expected to have influenced foreign investors to revert back to the safe haven of the US Dollar and other less risky asset classes.

Thereby, the Rupee also has shown signs of weakness continuously depreciating over the last 4 weeks.