Sri Lanka’s Central Bank inching towards taper tantrum: First Capital Research

First Capital Research believes that there is a 95% probability for policy rates to remain unchanged at the next monetary policy meeting due to the measures taken by CBSL to stimulate the economy.

CBSL either can choose to hold policy rates steady or hike by 25 bps while rate cut is off the table due to the high debt repayment and the high domestic borrowing requirement.

“We believe that there is a significant probability 95% to hold rates due to the considerable improvement in high-frequency indicators with the fiscal and monetary measures implemented so far,” First Capital Research said.

“However, there is a 5% probability for 25 bps rate hike to balance external
pressure.”

Towards the 2H2021E, First Capital Research expects a continued increase in probability for a rate hike in order to prevent overheating of the economy amidst the given fiscal and monetary stimulus.

However, the probability for maintaining rates continues to be the majority probability for the rest of the year.