2 March 2023 01:05 am Views - 173
The analysts at First Capital Research (FCR) assigned equal weightage between a rate cut and an unchanged policy stance at the upcoming monetary policy announcement tomorrow afternoon but they doubled down on their bets on a dovish tilt by the members of the rate setting committee at the next review, with a sizable rate cut in the second quarter.
The members of the Monetary Board meet tomorrow morning for the second time of the year to determine the appropriateness of the current monetary policy stance, which they established through the first half of last year by taking it to ultra-tight levels to rein in the runway inflation and also to alleviate the pressure on the foreign exchange conditions.
After raising the policy rates by an unprecedented 950 basis points in 2022, the Monetary Board has paused the policy at the exiting levels to see the impacts of its actions on the real economy.
According to the classical economist Milton Friedman, the monetary policy has long and variable lags between the monetary policy action and its impact on the economy and specially on inflation.
Hence, the Monetary Board members appear to have taken a wait-and-see approach, to see if their previous actions have more room to run their cause.
Currently the key policy rates—the Standing Deposit Facility Rate and Standing Lending Facility Rate— stand at 14.50 percent and 15.50 percent, respectively. However, any future actions by the Monetary Board are largely tilted towards rate cuts, according to the recent communications from the Central Bank and also as reflected in the high-frequency economic indicators.
FCR in its pre-policy analysis titled ‘Ultimate pause ahead of a dovish landing’, gave several compelling reasons why the Central Bank could cut rates at the coming meeting.
The research house said the prolonged slowdown in the economy, persistent disinflation path, damage to business confidence from recent tax hikes and months-long decline in private credit could prompt a rate cut from the Central Bank.
It also provided with some caveats, which could prevent a policy pivot as early as this month, such as the delay in the International Monetary Fund deal and political uncertainty, which could turn a possible rate cut into an ill-timed move.
“We believe that the CBSL may consider maintaining the monetary policy rates at its current levels in the upcoming policy review meeting, allowing a soft landing from its hawkish to dovish stance,” FCR said.
“However, considering both arguments for and against monetary easing, we have assigned an equal probability for both scenarios,” it added.
The second monetary policy review for this year will be released at 4:30 p.m. on Friday.