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Central Bank seen standing pat on rates; but 25 bps rate cut likely year-end

DAILY MIRROR | 09.07.2019

The Central Bank will most likely stay pat in this month after it cut the key policy rates on May 31 by 50 basis points to revive a tottering economy, said First Capital Research, leaving space for another 25 basis point cut towards the final quarter of 2019, if the economy fails to get back on its knees.

Releasing a pre-policy analysis, the equity research firm stated that it believes the Central Bank could resort to lending rate caps before further policy easing, if the earlier policy easing fails to or delays in bringing the desired outcomes.

The Monetary Board turned dovish since April and the next monetary policy decision is due on July 11.

“Considering the fact that it is too early to assess the impact of the previous 50 bps rate cut, we believe that the monetary board would continue the policy rates with no change.

However, considering the slowness of the economy and the contraction of credit, we would not rule out a further 25 bps rate cut towards 4Q 2019, if economic growth fails to accelerate,” First Capital Research said

The research house last week gave an unusually positive assessment of the economy predicting an accelerated recovery in the economy receiving a tailwind from the lower interest rates.

Other analysts who remained largely skeptical of a faster turnaround stated structural issues and the lack of confidence in the economy by all its actors run much deeper than one would see from the daily headlines.

They say the failure in public policy during the last four and a half years has stifled business and consumer sentiment and putting that back on track needs much more than tweaking the monetary policy.

In a most recent meeting with bank executives, the Central Bank has indicated its desire to pursue growth over maintaining prices, Mirror Business learns.

Sri Lanka’s reported headline inflation hovers around 4.0 percent.

The current Central Bank Governor Indrajit Coomaraswamy repeatedly stated that he would avoid economic sugar highs through policy easing to give way to a sustained economic growth model.

As the current dispensation accelerates fiscal spending, mostly election-oriented, Sri Lanka is largely expected to overshoot its budgeted fiscal deficit target for this year. Higher fiscal deficits have been the chronic economic malaise in Sri Lanka plaguing the country into deep debt crises.

The country’s financial sector is also plagued with higher non-performing loans and has been teetering for much of the year.