Policy rates to hold steady, amidst sweeping measures to insulate economy: FCR

Jan 12, 2021 (LBO) – First Capital Research believes that there is a 60% probability to hold rates due to the considerable improvement in high-frequency indicators and with fiscal and monetary measures implemented so far.

However, there is a 20% probability each for 25 bps and 50 bps rate cut to support economic growth.

“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 Research said.

“Considering the reduction of SRR by 300 bps in two instances to 2% we expect SRR to remain unchanged at the same levels.”

Amidst the world on a money printing spree, SL’s CBSL holdings also recorded an all time high amount of LKR 885 Bn on 30th Dec 2020 as a result of printed money by the Govt in order to finance the fiscal deficit.

“We expect the injected cash via money printing may result in increased money supply and create demand driven inflationary pressures with the recovery of economic activities,” First Capital Research said.

“Therefore, further policy easing at the upcoming policy review is unlikely as further easing of monetary measures could result in an overheated economy.”

The Monetary Policy Review No. 1 of 2021 will be announced on Tuesday, 19 January 2021 at 7.30 a.m.