The Monetary Board (MB) of the Central Bank of Sri Lanka (CBSL) is expected to keep its key interest rates steady at its policy review on Monday (1), considering the prevailing vulnerable external environment and lower GDP growth level, economists and financial sector analysts predicted on Friday.
During the coming months, the Sri Lankan economy expects debt-driven inflows from the US$ 1 billion syndicated loan from the China Development Bank and US$ 250 million worth of Panda Bond issuances to boost reserves.
“The vulnerable external environment and lower GDP growth level provides lowered scope for the monetary board to hike rates. Continuous weakening in currency and continued foreign outflows almost completely removes the possibility of a rate cut, as it would aggravate outflows,” First Capital Holdings Head of Research Dimantha Mathew told Ceylon FT.
However, he highlighted the increased possibility of a hike in rates, depending on CBSL expectations of the debt-driven inflows to support reserves, which has so far been delayed by almost five weeks.
Heavy foreign outflows, lower foreign reserves and lower yields in bonds saw the currency suffer with a month-to-date depreciation of 4.6% against the greenback in September 2018, while over the last three weeks, overall yield curve experienced a steep spike, as the more liquid short- to mid-tenure yields jumped almost 100bps.
According to them, the Sri Lankan Rupee has settled down, following the rise in yield curve and weaker dollar witnessed over the last couple of days……Further, US Federal Reserve as expected increased rates by 25bps.
On a negative note on the back of stronger US economy and upgraded GDP growth target, Federal Reserve expects additional hikes to take place, with three hikes predicted for 2019 compared to the previously expected two hikes.
According to the statement made by International Monetary Fund (IMF) on Friday, Sri Lanka’s current account deficit widened on the back of higher fuel imports, despite strong export performance, while international reserves declined from their peak level in April, amid volatile global market conditions.
Growth is projected to remain below 4 per cent in 2018, and gradually reach 5 per cent over the medium-term.