StanChart says monetary policy likely to remain accommodative through 2021

• Says CB will anchor inflation between desired range of 4-6% 

Amid concerns that the Central Bank would be forced to put breaks on its current stimulus drive anytime soon to arrest the rising prices, Standard Chartered Bank (StanChart) expects the current dovish stance would remain through the end of 2021.

The Asia-focused lender further assuaged widespread concerns over the potential overheating of the economy, albeit there would be an uptick in the overall prices, as the authorities would manage to maintain the inflation between the desired band of 4-6 percent. 

The Monetary Policy announcement is due today and the policy rates are expected to remain largely unchanged. 
However, First Capital Research early this week said future monetary policy beyond today’s action could skew towards scaling back the current stimulus drive to prevent possible overheating.“We maintain our view that the Central Bank of Sri Lanka (CBSL) will keep policy rates on hold for the rest of 2021,” said StanChart in its latest global economic outlook for the third quarter. 

“Average inflation is likely to increase to 4.7 percent (2020: 4.2 percent) given improving economic activity, higher commodity prices and excess liquidity; this is still well within the CBSL’s target band of 4-6 percent,” the bank added. 

Sri Lanka’s prices across the board were seen rising fast lately amid supply chain disruptions, weakened rupee and import controls. 

The Colombo Consumer Price Index rose to 5.2 percent in June 2021, accelerating from 4.5 percent in May, despite subdued demand conditions due to restrictions on movement and other economic activities. Food prices surged 11.3 percent. 

However, the single most important pre-condition to ensure policy stability and to prevent any shocks and surprises from occurring is to unshackle the rest of the economy, which is still under certain restrictions. This is because low rates and markets with sloshing liquidity make only little to no sense if the output cannot be expanded, which could ultimately be a source for inflation. 

Early this week, The Hotel Association of Sri Lanka (THASL), the country’s largest tourism trade bloc, asserted that the limited operations allowed on dining, banquet and staying capacity, make little sense as such cannot keep the sector afloat.