By First Capital Research
GDP growth for 2Q 2017 was better than expected, growing by 4.0% YoY in the 2Q 2017, with the industrial and services activities recording higher growth rates of 5.2% YoY and 4.5% YoY respectively.
FC Research upgraded private sector credit growth for end 2017 to 16% from 14%, amidst a possible pickup towards year end. Private sector credit figures show an increase to LKR 53 billion in August 2017. Despite slowdown in the credit in July, and we believe overall credit is likely to continue to remain under control.
CCPI-based headline inflation accelerated on a YoY basis to 7.8% in October 2017 from 7.1% in September 2017. NCPI-based inflation also accelerated on a YoY basis to 8.6% in August 2017 from 8.6% in September 2017.
However, Core inflation remained under check, decelerating to 5.8% in October 2017 from 6.0% in September 2017.
FC Research forecast November 2017 CCPI headline inflation to beat 7.0% and CCPI core inflation at 4.7%.
FC Research View
FC Research believed that point-to-point inflation would dip beyond November 2017, despite food shortages due to higher base effect from increased VAT, implemented on November 2016. Further, going forward, Core inflation is likely to be around the 5.0% mark over the next few months.
Sri Lanka’s forex reserves assets dropped by US$ 418 million to US$ 7.29 billion in September, which was equivalent to about 4.5 months of imports from US$ 6.0 billion reserve at end 2016.
The CBSL had net purchased US$ 1.2 billion on a net basis from currency markets so far this year. FC Research View: FC Research believe Foreign Reserves are now at comfortable levels and likely to end the year around the US$ 7.0 billion mark.
During the last two months, CBSL bought down its holding in Government Securities from LKR 130 billion to below LKR 31 billion as at 1 Nov 2017.
Fed Rate Hike Expectations
Economists said the Fed will still pencil in three hikes for 2018, but with the first of those not projected until June, versus March in the Fed’s previous set of forecasts.
The September 2017 survey shows the Fed expects to raise policy rates in December 2017, with no further hikes expected since, until after May 2018.
Expected Monetary Policy Stance
FC Research believes that, considering the current economic conditions with better-than-expected GDP growth level and the considerable improvement in the Economic Health, the current monetary policy is appropriate and no change is required.
We expect the CBSL to keep the Statutory Reserve Ratio (SRR) unchanged at 7.50%.
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