CB expected to deliver at least two more rate hikes

• First Capital wants markets to price in another 100bp hike in key rates for 2022
• IMF’s absence could make bond yields to “skyrocket” above base case scenarios 
• Prime lending rate is estimated to climb to 10-11% in 1H22 and 11-12.5% in 2H22 
• Global central banks in extreme hawkish mode to combat inflation going out of control 

First Capital Research (FCR) expects the Central Bank to deliver two more rate hikes this year – one during the first half of 2022 and another in the second half, each with the size of at least 50 basis points to stabilise the economy reeling from higher consumer prices and foreign currency shortage. 
In what appeared to be the most comprehensive scenario based forecast made on the interest rates and the broader monetary policy by an independent firm, FCR said tighter monetary policy would push the bond yields sharply higher by at least between 250 to 350 basis points through 2022, with the prime lending rate also rising in tandem by 350 to 450 basis points by the year end.
“In 1H2022, the extremely weak economic indicators may force the Monetary Board to further tighten the monetary policy. Thereby, we expect two rate hikes in 1H2022,” FCR said in its report titled ‘Investment Strategy 2022’. 
“In 2H2022, we expect one more rate hike to place to balance the overall economic outlook,” it added.
If the forecast materialises, the benchmark one-year treasury bill yield would end up at between the 9.5 to 10.5 percent range by the end of the first half of 2022 and between 10.5 and 11.5 percent by the end of the second half of the year. 
Last week, the one-year bill rate ended up at 8.55 percent at the primary auction. 
The Average Weighted Prime Lending Rate (AWPLR), the benchmark short-term lending rate of banks, is forecasted at a range between 10.0 to 11.0 percent by the end of June 2022 and 11.0 to 12.5 percent by December-end.  

However, in a worst-case scenario, where Sri Lanka would neither seek the assistance from the International Monetary Fund (IMF) nor other inflows materialise to overcome the foreign exchange crunch, FCR expects the one-year bill rate to reach between 12.0 to 13.0 percent in the first half of 2022 and to 14.0 to 15.0 percent in the second half. 
Sri Lanka is still undecided over seeking the IMF assistance to ride through the currency crisis but the government said it remains open, should the situation warrants. Till then, the authorities would pursue the debt restructuring on their own, which they believe would yield results in the next six months. 
Sri Lanka has already successfully closed a deal with India for a US $ 1.9 billion worth of foreign assistance package, along with a deferment on another US $ 500 million loan. 
The Central Bank said bilateral talks are on course with Qatar, China, Japan and Turkey for swap lines, term loans and trade loans, which could alleviate some pressure on the foreign exchange until tourism and remittance inflows recover. 
The government said talks are also being held with multilateral lenders such as the World Bank and Asian Development Bank and the likes. 
Some economic analysts who are sceptical of the IMF package say that a package with the IMF wouldn’t automatically unlock billions of inflows, as some would expect and the short-term pain such a package would inflict on the economy isn’t worth the effort. 
Another segment says the IMF would reinstate lost confidence on the Sri Lankan economy among foreign investors and the IMF wouldn’t push for harsher austerity measures considering the circumstances created by the pandemic.
Central banks around the world, except China’s, are increasingly turning hawkish and the United States Federal Reserve, the de-facto global central bank last week, indicated that they would lift off from as early as March this year, potentially opening up a path for between three to six rate hikes of 25 basis points each, depending on the inflation trajectory there. 
Sri Lanka’s Central Bank delivered its second 50 basis points rate hike on January 20 since August last year to fend off the inflationary pressures and to minimise the pressure on foreign exchange. At the primary bill auction held yesterday (February 2), the Central Bank sold Rs.88.5 billion under the three-month bill, of which the yield slipped to 8.59 percent, easing from 8.63 percent a week earlier, while the yields of six-month and one-year bills held steady at 8.55 percent amid bids being rejected. 
The country’s inflation measured by the Colombo Consumer Price Index hit more than a 13-year high of 14.2 percent in January from a year ago but the monthly price movements pointed to some deceleration in the prices.