CB largely expected to keep policy rates unchanged

• Strong private credit growth in Feb. likely to be key factor
• Introduction of sector-specific lending targets likely 
• As of now, SDFR and SLFR at historical lows of 4.50% and 5.50%

The Monetary Board of the Central Bank, which met yesterday for the third time of the year to determine the rate path after assessing the efficacy of its previous policy measures, was largely expected to have decided to stay pat, as the economy is progressing towards the desired trajectory. 

There was a near total consensus among market participants and economic analysts ahead of today’s monetary policy decision announcement for the rate setting committee to reaffirm its commitment towards a dovish monetary policy, which has been maintained over a year up to now.  

They pointed at the strong rebound in the private sector credit in February, which grew by nearly Rs.80 billion and the clear signs of economic recovery, with the growing confidence among consumers and businesses of the current and future prospects of the economy. 

“Rates to hold steady as indicators make headway,” said First Capital Research in its customary pre-policy analysis, with a 90 percent probability, its highest confidence level applied in the recent history as to what the Monetary Board would do ahead of the policy announcement. 

The Monetary Board cut its key policy rates by a total of 250 basis points in five instances in 2020, in addition to the 100-basis-point cut in 2019, among other macro-prudential measures to provide an unprecedented level of monetary stimulus to support the economy, buffeted by the pandemic, last year. 

Currently, the two benchmark rates, which signal the direction of the other market rates in the economy— the Standing Deposit Facility Rate and Standing Lending Facility Rate— stand at 4.50 percent and 5.50 percent levels, the lowest in the history. 

While there may not be any more monetary easing by way of policy rate cuts, the Monetary Board could come up with specific lending targets aimed at channeling funds into priority and productive sectors of the economy, as they sounded less content with the amount of credit that had gone into these sectors, in early March.  

The data through 2020 showed that the personal loans having recorded the highest growth of 15.1 percent, while the other sectors such as credit to industry, agriculture and services, have lagged by huge margins. 

While there is already a 20 percent lending target for banks to loan to micro, small and medium enterprises, there might be specific targets introduced for sectors identified as priority under the current government’s economic policy. 

“Private credit increased by Rs.79.4 billion in February 2021, recording a growth for the seventh consecutive month, indicating a revival in gross loan disbursements. Growth reflects that both businesses and individuals are speeding-up economic activities. 

However, growth of credit towards productive sectors of the economy appears to remain inadequate,” First Capital Research said. 

However, if at all there is a case for further relaxation of the Monetary Policy today, the research house cited the government’s stronger desire to expand the economic output by 6.0 percent in 2020 and the need to keep the secondary market bond yields in check on a sustained basis as two key factors the Monitory Board might consider, should it deem another rate cut is needed. 

“Yields in the secondary market witnessed an increase with moderate market activity from participants, followed by a wait-and-see approach amidst the looming uncertainty. The last four bond auctions and four bill auctions were undersubscribed by a considerable amount, reflecting the lack of clarity among market participants with the current economic condition,” First Capital said. 

“We consider a rate cut would be required to sustain the secondary market rate at lower levels,” the research house added.