Analysts raise bets on a monetary policy pivot by 1Q23

Analysts have increased their wagers for a pivot in the monetary policy in the next three to six months, as they expressed worries over the deeper than anticipated contraction in the economy, which could get entrenched and reach to irrecoverable levels, if the authorities do not intervene. 

The bone-crushingly tight monetary policy adopted since April this year have become largely successful in reining in inflation before reaching hyper inflationary levels and has been able to restore semblance of stability into the foreign exchange markets and the broader external sector, as seen from the expanding exports and shrinking imports.     

Given these circumstances, analysts at First Capital Research (FCR) are of the view that the economy is getting primed for a dose of some monetary stimulus to turn things around and prevent the economy from further weakening.

Hence, they believe the Central Bank would tilt more dovish in the next three to six months, before the real pivot comes as early as the first quarter of 2023 by way of a rate cut.   “Considering the positive outlook over the next six to 12 months, we expect a complete normalisation of the economy with the country being able to secure necessary financing from the IMF and other multilateral creditors while regaining its access to the global capital market,” FCR said in a research note. 

“Thus, the complete stabilisation of economic indicators may give rise to a possibility of sizable rate cuts towards 1Q2023, with a significant probability to fast-track the revival of the economy,” 
it added.

However, it remains to be seen if the current developments in the economy would be adequate to influence the members of the Monetary Board to pivot from its tightening stance as soon as in 1Q23, as they are determined to restore price stability at any cost. 

Sri Lanka is also projected to confront consumer prices as high as 30 percent, even a year from now, which is far too much to identify as stability. The Central Bank’s job will only be done when inflation is brought back to their targeted range of 4-6 percent from the current 70 percent levels.  

In any case, the markets and analysts will watch closely for any change in the communication when the Central Bank announces its seventh monetary policy statement today, where the monetary authority is largely expected to maintain the current tight policy stance.