Monetary Policy to be maintained allowing impact of previous rate cut to materialize: FCR


July 08, 2019 (LBO) – Sri Lanka’s Monetary Board would continue the policy rates with no change, considering the fact that it is too early to assess the impact of the previous 50 bps rate cut, First Capital said in a research note.

“We believe that Monetary Board may first consider, CBSL’s ability to implement lending rate caps before further policy rate cuts being implemented,” the firm said.

According to First Capital, it may take a lengthier period for lending rates in the market to decline and stimulate growth as the high level of NPL in the system may delay the dip in lending rates.

However, in order to accelerate the reduction in lending rates, First Capital expects imposition of a cap on lending rates to enhance credit flows to the economy with the intention of boosting the economic and credit growth.

“However, considering the slowness of the economy and the contraction of credit, we would not rule out a further 25 bps rate cut towards 4Q 2019 if economic growth fails to accelerate.”

The Central Bank reduced the SLFR and SDFR by 50 bps previously as policy intervention was required to address the subpar economic growth which was further affected by the Easter Sunday attacks.

Sri Lanka maintained foreign reserve position at 6.7 billion dollars by the end of May which is noteworthy considering the major outflows in April.

Sri Lanka successfully raised 2 billion dollars by conducting an international sovereign bond offering tenors of 5 and 10 year.

“Following the issuance, we expect the foreign reserves to show significant improvement reaching above USD 8.0Bn in Jun 2019 while maintaining above USD 7.5Bn during Jul to Dec 2019,” the firm said.

Meanwhile, the cabinet approval was granted to raise up to 480 billion dollars for debt management, which provides leeway for the Central Bank to raise further 2.5 billion dollars to manage debt in 2020 which would be an election year.

“Sri Lanka’s next international sovereign repayment is only due in Oct 2020 amounting to USD 1.0Bn while 1Q and 2Q each constitute USD 0.4Bn of SLDBs maturing,”

“Raising funds well in advance for repayments is expected to significantly strengthen macro economic outlook for Sri Lanka and to reduce unnecessary volatility.”

During the month of June, USD:LKR remained stable to close at 176.42 on 28 Jun 2019 supported by foreign inflows, exporter conversions and contraction in imports.

However, REER continued to remain undervalued at 91.95 in May while the firm estimates it to be 92.35 in Jun.

The external environment is favoring lower yields as the weakening US economy led the Fed to rethink its interest rate normalization strategy resulting in Fed indicating a likely monetary easing in upcoming meetings.

The situation has weakened the dollar further supporting the stability of rupee.

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