First Capital predicts possible policy rate cut next week amid sluggish economy

First Capital Research predicts a 50 percent chance for a policy rate cut at the next monetary policy review of Central Bank to be held next week amidst overly sluggish economic growth.
“First Capital Research allocates a 50 percent probability for a policy rate cut in April 2019 as we are of the view that policy intervention is appropriate to address the overly sluggish economic growth. 

“Keeping in line with the possible introduction of a single policy rate, we believe a rate cut, if at all, will be applicable only to Standing Lending Facility Rate (SLFR),” First Capital Research said in its latest pre-policy analysis report. 

Sri Lanka recorded an alarmingly low growth of 1.8 percent for the four quarter of 2018, while the annual growth for 2018 fell to 3.2 percent compared to 3.4 percent in 2017.
First Capital Research noted that probability of a rate cut increase by 40 percent given the less than anticipated GDP growth in the fourth quarter of last year. Hence, there’s a 50 percent chance for the Monetary Board of CB to cut SLFR by 25 bps to support the economic growth. 

The Central Bank in their last monetary policy review reduced the Statutory Reserve Ratio (SRR) by 100 basis points to inject Rs.60 billion to the money market as they believed there was a Rs.100 billion liquidity deficits in the market. 

Hence, First Capital Research expects a continuation of the rates while permitting the effect of the recent rate cut to materialize despite the increase probability for a rate cut at the next monetary policy review.

“However, considering the negative liquidity position we allocate a further 50 percent probability for no change in rates as the Central Bank may consider delaying the rate cut up to the next policy meeting in May 2019,” First Capital Research said. 

According to their analysis, the probability for a rate cut in May monetary policy review will exceed 60 percent.

As US Federal Reserve signalled that it would keep policy rates unchanged for the rest of the year, First Capital Research said that the global fund flow, which is already shifting towards emerging markets, is likely to further strengthen and continue with the US yields easing off.

In addition, they said that the political uncertainty prevailed at the latter part of last year has worn off to a certain extent with the Tamil National Alliance supporting the UNF Government on the passing of the budget.

First Capital Research sees these developments positively impacting Sri Lanka’s external sector, paving the way for the Central Bank for a potential SLFR cut either in April or May. 
The rupee has already strengthened this year by over 2 percent so far backed by foreign remittance conversions and foreign inflows.