NDB Securities expects Central Bank to deliver 250-300bps policy rate cut today

Equities broker NDB Securities expects that the Monetary Board of the Central Bank will announce a 250-300-basis-point policy rate 
cut, today.The Central Bank will announce the fifth monetary policy review for the year, this morning.

“Due to the sharp deceleration in inflation and the significant downward adjustment in market interest rates following the Domestic Debt Optimisation (DDO) announcement, we anticipate that the Central Bank is likely to cut rates by at least 250-300bps in the July MPC meeting,” NDB Securities said in its July MPC Preview.

It pointed out that the spread between the current policy rates (SDFR at 13 percent and SLFR at 14 percent) and the expected inflation is significantly high at present. 
“Therefore, considering the projected decline of inflation to high single digits in July 2023, it is evident that a substantial adjustment in policy rates is warranted,” 
it noted.
“A policy cut will also have a strong signalling effect on the market, helping to bring down the overall market interest rate structure and contribute to a faster recovery of economic growth,” it added.
The Central Bank announced a policy pivot in June by delivering a 250-basis-point policy rate cut, effectively ending a 21-month-long tightening cycle. 
The main reason cited for this policy pivot was the faster-than-expected deceleration of inflation. Headline inflation in June, as measured by the Colombo Consumer Price Index, eased to 12 percent on a year-on-year basis, from 21.5 percent in May. Core inflation followed suit, dropping to 9.8 percent, from 20.3 percent in May 2023.

NDB Securities expects inflation in July 2023 will decrease to high single digits and decline further in August 2023.
Meanwhile, NDB Securities said the government securities yields adjusted downward sharply, following the DDO plan announced by the government. On Tuesday, the first trading day after the DDO announcement, yields on government securities fell sharply, with the DDO risk premiums coming off. 

The market was anticipating the worst in terms of the DDO plans but the government’s proposal was better than feared, as it only included superannuation funds and the Central Bank in the local currency debt envelope. 

Secondary market bond yields decreased sharply on Tuesday, by approximately 10-12 percent and the benchmark five-year bond yield currently hovers around ~13.75 percent, compared to its closing of 23.2 percent on June 28.