• Says it’s desirable for Central Bank to operate with enough policy headroom to respond to shocks

First Capital Research thinks it is appropriate for the Central Bank to stay pat at the next policy meeting scheduled for this week as the policy rates at current levels are neither too expansionary nor restrictive, offering the rate setting committee the headroom to respond should any uncertainties arise post election or any other external events.

The Monetary Policy Board as it is now known is set to meet later this week to determine how appropriate its current policy stance to support the economy which has shown ample evidence of continued growth.

The Board which was scheduled to meet on September 20 to decide on the fifth monetary policy, postponed the date of the announcement to September 27 due to elections.

In July, at its fourth policy announcement, the Central Bank somewhat surprised the markets by cutting the policy rates by 25 basis points to 8.25 percent and 9.25 percent respectively across Standing Deposit and Lending Facility rates, signalling its continued commitment towards monetary easing.  

But the team at First Capital Research expects the Central Bank to leave the key policy rates unchanged at the upcoming policy meeting for it to have enough policy headroom to respond, supporting the economy should any unexpected events occur.

“If interest rates are set too low, the Central Bank would have limited policy tools available to stimulate the economy during potential downturns”, they said.  

“Currently with rates low, further relaxation of policy rates could reduce the room for adjusting monetary policy to encourage consumer spending and economic activity further, leaving the economy vulnerable to external shocks or domestic challenges”, First Capital added in their customary pre-policy analysis.

The Central Banks around the world made deep cuts to their key policy rates and injected record levels of liquidity into their respective economies starting from the onset of the pandemic in 2020 to support millions who lost jobs and incomes, and businesses to backstop them from going out of business.

Besides the need to operate with policy headroom, First Capital Research sees the mild prices, recovering credit to the private sector and thereby the economy and the completion of bond restructuring as among others as compelling reasons for leaving the rates unchanged.

They see a low chance—around 20 percent—of a follow-up rate cut of 25 to 50 basis points. The aim would be to prevent deflation, as current headline inflation remains very low, and to align with monetary easing by major central banks, including the U.S. Federal Reserve, which recently cut its federal funds rate by 50 basis points.