Policy rates expected to stay at current levels

First Capital Research (FCR) assigned a 50 percent probability for the Central Bank to leave the key policy rates unchanged at the monetary policy announcement scheduled for today, as the members of the rate setting committee met for the first time this year yesterday to assess the appropriateness of the monetary policy.
However, FCR assigned the balance 50 percent between a 25 and 50 basis point cut in policy rates with 45 percent and 5 percent probability levels, respectively.
Even if the Monetary Board maintains the rates at the current levels, FCR skewed its view to a more dovish policy after January, given the extremely weak outlook for the economy. 
FCR has its betting on a pivot in the monetary policy somewhere in the first quarter to support a contracting economy. 

FCR also views that the ease in inflation will also provide a compelling reason for policy relaxation going forward.   
Sri Lanka’s consumer prices peaked in September at just under 70 percent and have since eased for three consecutive months. 
Central Bank officials have consistently indicated that the market interest rates should follow the declining trend in inflation.
Finally the short-term lending rates have begun to come off a peak as the prime lending rate fell for two weeks in a row. 
Backing some relaxation in the monetary policy also are easing Treasury bill yields and the recovery in liquidity in the overnight market.