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CBSL likely to cut policy rates: First Capital Research

Ceylon Today | 28 -05 -2019

Previous pre-policy issue; Central Bank gives forward-looking guidance.
The Monetary Board observed that the continuation of the current monetary policy stance is appropriate, while providing forward-looking guidance of possible monetary easing.
Macroeconomic fundamentals steadily improve;
The Central Bank (CBSL) maintaining its foreign reserve position above US$ 7.0 billion (US$ 7.2 billion by end-April 2019) is noteworthy, considering the major outflows in April 2019. The IMF approved the 6th tranche of US$ 164.1 million while granting a one-year extension until June 2020, providing a cushion to the country’s economy to recover from the recent attacks.
Falling below the CBSL’s credit growth projection of 13.5 per cent, private sector credit growth decelerated at an alarming rate to record YTD growth of 0.5 per cent during the first quarter, leading to a contraction in financial sector asset-base.
The rupee continued to strengthen to close at 176.24 to the U.S. dollar on 22 May 2019, supported by foreign remittance conversions and foreign inflows during the festive seasons. However, REER continued to remain undervalued at 94.74 in March 2019.
A sustained positive liquidity position was created after a lapse of six months, resulting from multiple SRR cuts and the Government making the long-delayed payments providing CBSL the ability to discontinue daily reverse repo auctions and term reverse repo auctions.


Easter Sunday attack dampens growth prospects

The Easter Sunday attack is expected to have a detrimental impact on the economy, possibly further slowing down the sluggish economy. First Capital Research (FCR) expects the recovery would require at least a year, forcing a downward revision to its 2019 GDP growth projection to below 3.0 per cent from 4.3 per cent previously.
FCR allocates a 95 per cent probability for a policy rate cut in May 2019, as it is of the view that policy intervention is inevitable to revive the overly sluggish economy and credit growth. Despite the Road Map towards a single policy rate, FCR believes a rate cut in both SLFR and SDFR is more appropriate, considering the severity of the situation. However, in the case of a 75bps or a 100bps rate cut consideration, though remote, CBSL may consider a lower cut for SDFR.