CB expected to hold rates as January cut takes effect

First Capital Research ruled out a possibility of back-to-back rate cuts by the Central Bank at the policy meeting scheduled for tomorrow, as the January rate cut is slowly taking hold as credit growth showing signs of picking up and inflation remaining under check. 

The second policy meeting for the year by the Monetary Board is scheduled for tomorrow after the Board cut policy rates by 50 basis points in end-January to provide additional nudge to the government’s fiscal stimulus.

“Considering the recent major fiscal and monetary policy changes and expected pick up in private credit, First Capital Research believes that current monetary policy stance is appropriate, and credit growth is likely to accelerate towards 2H2020 with the current low level of market lending rates without requiring further adjustment in policy rates. 

“Accordingly, we assign a 100 percent probability for no change in policy rates in the upcoming policy announcement,” First Capital Research stated in their regular pre-policy analysis. 

This is the first time in many months First Capital took an absolute stance on the possible direction of the policy rates. 

In January it weighed the Monetary Board to stay pat but the action that followed went against its bet. 

“In contrast to our expectations at the last policy meeting held in Jan 2020, CBSL reduced its policy rates by 50bps to support the continued reduction in market lending rates, thereby facilitating the envisaged recovery in economic activity,” the research firm noted. 

First Capital holds a sanguine outlook for the economy with both fiscal and monetary stimulus kicking in and expects the conclusion of the forthcoming general election to boost economic activities, including higher credit from the second half of the year. 

“Going forward, a steady revival of economic activity is envisaged, supported by potentially further improved political stability after the General Election on April 25 and the measures taken to stimulate the economy including heavy tax cuts and lending caps. 

With the decline in lending rates, credit growth has shown signs of improvement; however the acceleration is mostly likely to take place towards 2H2020.” 

The research firm believes February inflation, which hit 6.2 percent, is transitory and would hover and stabilise between 5 to 6 percent range in 2020 supported by the recovery in the supply side factors, “thus requiring no changes in monetary policy measures”.