Analysts bet on another 50 bps hike tomorrow

• Consensus building up that economy can withstand another rate hike without destabilising recovery

The economic analysts at First Capital Research (FCR) are betting on a back-to-back policy interest rate hike by the Central Bank when they meet today for the second time of the year to determine if the current monetary policy is adequate to blunt the imbalances intensifying in the economy. Sri Lanka is facing its worst foreign exchange crisis, fuel and other commodities shortages, daily power cuts amid over a decade high consumer prices. 

FCR in its customary pre-policy analysis bet on another policy rate hike announcement on Friday after the Central Bank delivered a 50 basis point hike in January to address the aforementioned issues and restore greater 
economic stability. 

FCR assigned a 40 percent probability for a 50 basis point hike at the upcoming meeting, followed by a 30 percent probability for a 100 basis point hike. 

Global central banks barring China are turning extremely hawkish and have begun to withdraw pandemic era support to their economies, which resulted in entrenched price pressures.  The United States Federal Reserve, the de facto global central bank, is widely expected to deliver its first 25 basis point rate hike in March, opening the path for several more rate hikes in the remainder of the year, as Americans are battling 40-year high inflation.

The breaking out of the Russia-Ukraine conflict is further making things worse for global consumers, as the energy prices are rising.  For instance, at the Brent futures exchange, the global oil benchmark, the prices touched US $ 110 a barrel yesterday, hitting a new seven-year high. 

Sri Lanka is currently running through an extremely lean patch and oil above US $ 100 a barrel could be the death knell to its already reeling economy. 

Unless Sri Lanka sells oil at the market price while at the same time remove the taxes on fuel and start making cash transfers to the most vulnerable segments in a targeted manner, Sri Lankan economy could soon come to a grinding halt. FCR however had a few qualms whether a tighter monetary policy could address supply-side shocks and geo-political tensions.  While there are some concerns of a possible derailment of the economic recovery from a tighter policy, the most recent high frequency numbers point to undeterred recovery despite some tightening in money conditions.  Hence, there is wider consensus building up among economic analysts that the Central Bank could deliver another rate hike without significantly damaging the current economic recovery.