Strong possibility of a rate cut; interest rate decline to boost stock market: Capital Trust

May 26, 2019 (LBO) – Sri Lanka’s Central Bank Governor Indrajit Coomaraswamy has hinted a strong possibility of a policy rate cut at the next monetary policy review meeting scheduled on 31 May 2019.

According to the Governor there is a strong case for relaxing monetary policy.

“All options are there, it could be a SRR (Statutory Reserve Ratio), it could be a policy-rate reduction, or it could be a combination of the two,” Governor told Bloomberg television during an interview in Singapore.

Capital Trust Securities said in a statement that since the beginning of 2019, the 12-month Treasury bill yield has declined 230bps, while 6-months and 3-months yields have declined 128bps and 149bps respectively.

Treasury bill yields may further decline in response to a rate cut, and the Central Bank expects the lending rates to SMEs to reduce by around 200 basis points in the near term.

The Central Bank requested licensed banks and Non-Banking Financial Institutes (NBFIs) to reduce interest rates on deposits enabling banks to reduce their interest rates on lending products in general.

“When interest rates reduce significantly it will improve corporate earnings due to increase in consumer spending and decline in finance cost, which will cause share prices to rise,” Capital Trust Securities said.

“Furthermore, decline in interest rates will reduce the yield form fixed deposits and government securities which will drive the demand for stock market investments.”

Historically the stock market has risen sharply when the Central Bank reduced policy rates; hence this is an opportune time to invest in the Colombo Stock Exchange (CSE).

“Most of the fundamentally strong shares are now trading at valuations lower than what was seen before the end of the war, and also economic indicators are much better than what it was during the war,” the firm said.

“Both these reasons are strong cases for investors to shift from traditional investments to Stock Market investments.”