Sri Lankan interest rates unlikely to rise or fall on Thursday-research report

The Central Bank (CB) is most likely to maintain interest rates at current levels when it present’s the CB Monetary Board’s policy for this month on Thursday (October 6), First Capital Research (FCR) said in a report on Tuesday.

“As per our view, at the upcoming policy meeting, there is a high possibility for the CB to maintain the rates at its current levels allowing further strengthening of key economic indicators, along with a lower probability for a dovish stance to relax its policy rates in order to prevent a major economic downturn as well as to signal the market participants a clear direction on the way ahead. As a result, we assigned a major probability of 75 per cent to maintain the rates while also assigning a lower probability of 25 per cent towards a monetary relaxation. Moreover, considering the persistent negative liquidity in the banking system, we assigned a lower probability of 15 per cent for a 50bps cut in the SRR while placing majority bets on the SRR to remain unchanged,” it said.

The report said that economic activities in Sri Lanka have severely contracted during 2Q2022 to a GDP growth of -8.4 per cent. The larger than expected slump in the economy is alarming (and requires) prompt remedial actions before it cascades to irrecoverable levels.

On the other hand, key economic variables such as the forex rate, external sector activities, foreign activity as well as inflation that were dangerously heated during the heart of economic crisis have almost cooled off at a much more rapid rate than expected and are positioned for a monetary stimulus to gear up the economy, the report said.

Accordingly, the gradual transformation of the monetary policy stance that FCR projected to effect over the next 3-6 months is now accelerated and, “we transition our perspective from hawkish to dovish”. “Thus, we completely eliminate the possibility of a further monetary policy tightening while gradually increasing the probability of a monetary relaxation in the next 3-6 months,” the report added.