Rate cut likely if private credit remains subdued

• After an acceleration in Dec. 2020, private credit significantly slowed in Jan. and expected to continue through Feb.
• ICRA Lanka says if credit growth becomes weak in 1Q, markets may anticipate some policy action at next Monetary Policy Committee meeting in April
• CB wants to expand private credit by as much as 14% or by Rs.864bn this year

Credit rating agency ICRA Lanka yesterday hints at the possibility of another policy rate cut, should private credit remained weak in the first quarter, as the Central Bank appears impatient to see its actions turning into faster credit flows to the real economy via low-cost loans.

In its regular economic update issued every month, ICRA Lanka forecasted subdued growth in private sector credit continuing through February, after it accurately predicted a slowdown in credit flows to private individuals and firms in January 2021. 

“In line with ICRA Lanka’s previous expectation, the private credit slowed down in January. The credit grew only by Rs.26 billion with respect to December 2020, lowest month-on-month increase since July last year,” the rating agency said as credit growth faltered since licensed commercial banks gave Rs.76.7 billion in private credit in December 2020. 

“Private credit generally tends to falter whenever the reserve money growth slows down. Hence, we expect the private credit to have grown slowly in February as well,” it added. 

The Central Bank wants to expand private credit by as much as 14 percent or by Rs.864 billion this year, not so much an ambitious target considering the historically low lending rates, which are hard to resist.

The Central Bank is continuing talks with banks to see the possibility of further supporting the priority economic sectors via specific lending targets under the broader 20 percent target set for the micro, small and medium enterprise sector in January. 

“… if the credit growth becomes weak in 1Q, the CBSL will be on the spotlight as markets may anticipate some policy action in the next Monetary Policy Committee meeting early April,” the rating agency said. 

The Central Bank unleashed close to Rs.900 billion in credit in a single year, as the economy is operating with significant slack, due to five years of undergrowth through 2019, caused by bad policies and a de-growth in 2020, caused by the pandemic. 

Further, the Central Bank is confident that prices will remain benign through 2021, a serious caveat, which must be dealt with when the money supply soars in the economy. 

“There is no immediate sign of inflation taking off but rising commodity prices and import restrictions may push up prices in certain sectors,” ICRA Lanka said, underscoring the moderate inflation expectations.