Bond markets price in rate cuts expected as early as next monetary policy meeting

• Economy could stage growth in 2023 as opposed to dour outlook by multilateral agencies, says Bloomberg Economics

Bond markets have already priced in rate cuts as early as the next policy meeting in June as yields fell sharply across government securities even before this week’s monetary policy meeting. 

The bill yields fell sharply across the board this week at the weekly bill auction held on Tuesday just ahead of the announcement of the third monetary policy for the year where the members voted to hold policy rates at 
current levels.

The 3-month bill yield fell by 187 basis points to 24.12 percent, 6-month bill yield shed 169 basis points to 24.10 percent and the benchmark 12-month yield gave up 194 basis points to settle at 22.37 percent this week, falling by the most for a week in recent times.

With this week’s plunge, the yields have fallen by a cumulative 852 basis points for 3 months bills, 810 basis points for 6 months bill and 690 basis points for the 1-year bills since the current streak of declines began in mid-December 2022.

Meanwhile, the lending markets too have been responding swiftly defying even the shock rate hike in March as they accelerated their declines in recent weeks. 

The prime lending rate which is closely aligned with key policy rates and market liquidity fell sharply in the recent weeks. 

By the end of last week, the prime rate fell by another 34 basis points, extending its weeks-long descent in the benchmark lending rate to 21.40 percent.

The benchmark lending rate has given up nearly 6.0 percent so far since the end of last year. 

Meanwhile, Bloomberg Economics this week considered the rates at the peak and the cuts would come as early as the third quarter.

“Inflation is set to cool through 2023 as the International Monetary Fund’s aid disbursement helps ease supply snarls and a high year-earlier base slows year-on-year price gains,” they said.

“That should provide the room needed for the Central Bank to start cutting rates in the third quarter and support the recovery,” Bloomberg Economics added. 

They also expect the economy to stage 2 percent growth this year, which stands in contrast with growth forecasts by multilateral funding agencies.

“It is possible that IMF and the CBSL are underestimating the strength of the recovery in tourism sector and expecting a slower easing of supply snarls than we anticipate,” they said.