First Capital Research believes that the Central Bank will not change its policy rates at the policy meeting scheduled for tomorrow (5), as it reduced rates by 50 basis points in January 2020 to support the continued reduction in market lending rates. The second policy meeting for the year by the Monetary Board of the Central Bank of Sri Lanka is scheduled for tomorrow (5 February) after the Board cut policy rates by 50 basis points in end-January to support the continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity. “Considering the recent major Fiscal and Monetary policy changes and expected pick up in private credit, First Capital Research believes that current monetary policy stance is appropriate, and credit growth is likely to accelerate towards 2H2020 with the current low level of market lending rates without requiring further adjustment in policy rates. Accordingly, we assign a 100% probability for no change in policy rates in the upcoming policy announcement,” First Capital said in their regular pre-policy analysis. Private sector credit recorded an increase of LKR 57.9Bn in Dec 2019, illustrating a positive credit growth for the 5th consecutive month in 2019 with YTD growth at 4.5%, closing in, on our credit growth target for 2019. Going forward, a steady revival of economic activity is envisaged, supported by potentially further improved political stability after the General Election on 25th Apr 2020 and the measures taken to stimulate the economy such as heavy tax cuts and lending caps. With the decline in lending rates, credit growth has shown signs of improvement; however the acceleration is mostly likely to take place towards 2H2020, it added. The market saw a sudden surge in the liquidity levels over the last couple of weeks amounting to LKR LKR 48.0Bn by end of Feb (after adjusting for term repo and reverse repo auctions conducted by CBSL) compared to LKR negative 8.0Bn in the beginning of the year indicating an increase of nearly LKR 56.0Bn. The higher liquidity position favour the banking system to accelerate disbursements thus supporting the credit growth in the economy. Improving YoY credit growth may reduce the strong liquidity position towards 2H2020. Since the previous rate cut, continued net foreign outflows from the Government sector market was witnessed resulting in an outflow of LKR 16.7Bn since 30th Jan 2020. In recent developments, foreign holding in T-Bill and T-Bonds securities declined below LKR 100.0Bn for the first time in 12 years (since 2008) due to continued foreign selling followed by the surprise rate cut in Jan 2020. With the foreign outflows, LKR witnessed a depreciation during the month to close at LKR 181.95 relative to LKR 181.34 held on 31st Jan 2020 although the depreciation in the currency was not higher due to the lesser pressure on BoP due to relatively lower imports. The 6.2% CCPI recorded in Feb 2020, is the highest since the 7.1% seen in Dec 2017 and was mainly led by the increase in food inflation owing to domestic supply side disruptions. In spite of such short-term fluctuations, First Capital Research believes inflation to hover and stabilise between 5%-6% in 2020 assisted by recovery in supply side factors thus requiring no changes in the monetary policy measures. In light of subdued global growth due to outbreak of Covid-19 and considering its impact to the economy, the Fed Reserve indicated that U.S is open for a rate cut to act as appropriate to support the economy while analysts predict that Fed is likely to announce a 50bps cut at its Mar 2020 meeting with fears over a global slowdown intensifying. With another round of monetary easing on the cards, global funds are shifting towards U.S adversely impacting emerging and frontier regional markets including Sri Lanka. Hence, First Capital Research expects Policy rates to be maintained as additional time is required to realise the impact of previous rate cuts.
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