FCR expects CB to maintain policy rates tomorrow

First Capital Research (FCR) expects the Central Bank to hold its key interest rates unchanged at tomorrow’s monetary policy announcement while turning dovish in the next 3 to 6-month period ending the tightening cycle. 

FCR assigned a 75 percent probability for the Central Bank maintaining the current policy rates and a lower 25 percent probability for a rate cut. 

The research house completely ruled out further monetary policy tightening as the Sri Lankan economy is projected to contract at about 9 percent this year, deeper than what was earlier expected. 
Further, the inflation is believed to have peaked and the worst of the foreign exchange crisis appear to be over with limited fluctuation in forex rates and external sector improvements.
Following Sri Lanka securing a staff deal with the International Monetary Fund, higher foreign interest towards rupee debt was witnessed. 

Further, Treasury bill yields have recorded back-to-back declines in recent auctions.
“Accordingly, the gradual transformation of the monetary policy stance that FCR projected to effect over the next 3-6 months is now accelerated, and we transition our perspective from hawkish to dovish. 
Thus, we completely eliminate the possibility of a further monetary policy tightening while gradually increasing the probability of a monetary relaxation in the next 3-6 months,” FCR said.

Considering the positive outlook over the next 6-12 months, the research house expects the economy to normalise with Sri Lanka securing a bailout package from the IMF and additional financing form multilateral creditors while regaining access to global capital markets. 
“Thus, the complete stabilisation of economic indicators may give rise to possible sizeable rate cuts towards 1Q2023 with a significant probability to fast track the revival of the economy,” FCR said.