Probability for a rate cut to discourage LCBs from using SDFR facility: First Capital Research

Aug 19, 2020 (LBO) – First Capital Research (FCR) says that the Central Bank either can choose to hold policy rates steady or cut by 25 bps or 50 bps while a hike is off the table due to the lackluster economic growth.

The next monetary policy review is scheduled to be announced tomorrow at 7.30 a.m.

“We believe that there is a 40% probability for a 50 bps rate cut and 10% probability for a 25 bps cut to discourage the LCBs from using the SDFR facility,” FCR said in a research note.

“Moreover, there is a 50% probability to hold rates due to four successive rate cuts in the past.”

Considering the reduction of SRR by 300 bps in two instances to 2%, they believe that further SRR cut is not required as O/N liquidity has reached nearly one and half months high.

The following factors argue that there is no requirement of further easing in policy rates. (Arguments against further easing – 50%)

  • Improved liquidity position requires no further policy easing
  • Four successive rate cuts
  • Possible Inflationary woes
  • Most global countries maintain stable policy

Below factors spur a further leeway of a rate cut at the up coming policy meeting. (Arguments for further easing – 50%)

  • Contraction in GDP Growth in the 1Q2020 prior to COVID-19
  • Lackluster private credit growth
  • Stability in the external environment
  • Rise in bond market yields