CB projected to deliver two more policy rate hikes this year encompassing 200bps

First Capital Research (FCR) revisiting its earlier forecasts said it now expects the Central Bank to deliver two more rate hikes in the second half of the year, up from the previously forecasted three for the full year, taking the total number of rate hikes pinned for the year to four. 

In a note released just less than a week after the Central Bank’s 100 basis point hike, the research house said it expects a further 200 basis point hike from two more rate hikes occurring in the second half, bringing the size of the total hike in rates to 350 basis points in 2022. 

“In 1H2022, the extremely weak economic indicators forced the Monetary Board to further tighten the monetary policy,” FCR said. 

“Considering the significant deterioration in economic conditions, we increase our rate hike expectations to a total of four for 2022E, from previous three, which targeting two rate hikes (200bps) in the 2H2022E to combat the macro pressures,” it added. 

This is by far the most hawkish bet on the future trajectory of the interest rates in Sri Lanka, as the country is battling its worst economic crisis since at least the early 1970s, when the then rulers ran a closed economy forcing people to stand in queues for daily necessities, making their lives miserable. 

Liberal economists have long been calling for progressive reforms in the economy with open markets, flexible exchange rate and sustainable budget deficits to provide economic freedoms to the people and businesses and also to bring about economic well-being. 

But the entrenched thinking that domestic production and import substitution could make people economically better off have pushed the country back at least half a century behind and kept people impoverished. 

The notion that big governments collecting higher taxes could distribute incomes fairly has also led to the current economic malaise, where a larger parentage of the population hold the belief that the government will take care of them no matter what. This was proven wrong when the economy was closed for many months during the two years of the pandemic, when the government struggled increasingly to provide assistance to those who lost incomes and livelihoods. 

Although too late, Sri Lankan economy is at least now being steered towards the right path with higher rates, floated currency and measures to monetise loss-making state-owned enterprises. Among the eight-point reform plan presented to the government, what is imminently required now is to ensure that a mechanism is developed to tie the prices of all utilities to the changes in the global commodities prices and thereby shelve the reliance on the budget to absorb losses and provide subsidies. 

To do that, the Finance Ministry must immediately survey the most vulnerable segments of society to provide them with highly targeted assistance by way of cash transfers to ensure they don’t get unduly hurt from the immediate implications coming from the reforms.