Sri Lanka’s Central Bank will have to raise key policy rates by at least another 25 to 50 basis points by mid part this year, further tightening its monetary policy stance to curb the excessive credit flows, maintain price stability and also to minimize the unusual distortion in the government securities market, according to an economist.
While admitting a lag in the monetary policy transmission, the JB Securities (Private) Limited economist, Eshini Ekanayake cautioned that private sector credit growth could pick up in the second half of the year despite the rise in interest rates and the inflationary pressure could build up due to higher taxes which would be implemented at some point.
“We think that the Central Bank is likely to maintain its tightening cycle. We expect a 25 to 50 basis points increase in policy rates mid of this year or during the second half of this year. However, we challenge the view that policy rates will be increased more than that,” Ekanayake told a forum held at the National Chamber of Commerce yesterday on the current economic outlook of the country.
The Central Bank began its tightening cycle in December 2015 by raising the banks’ reserve ratio by 150 basis points, mopping up at least Rs.50 billion in liquidity and, later raised its key policy rates by 50 basis points in February 2016 to tame an overheating economy, which resulted in contraction in monthly private credit and core-inflation.
Ekanayake, further building up the case for a rate hike said, the market interest rates would pick up fast and remain well above policy rates and, hence it warrants a hike in key rates as it creates a huge arbitrage opportunity for those who deal in government securities market. But the Central Bank last week disappointed the markets by maintaining the status quo, saying that there is a transmission lag in the monetary policy and a lot of cooling down could happen with the forthcoming fiscal consolidation measures than with the monetary policy itself.
It was only this week the ex-Central Banker and economist Dr. W.A Wijewardena said by keeping the interest rates lower the Monetary Board creates an arbitrage opportunity for the banks to make profits by borrowing low at Standing Lending Facility Rate at 8.0 percent and either by lending to the banks in deficit or lending back to the government through treasury bills and bonds at much higher rates. “The Central Bank will have to pump money continuously to the market without ever reaching the equilibrium level. In the process, it gives wrong signals to banks that they could make profits out of Monetary Board’s anomalous monetary policy without lending to customers.
These low interest rate regimes have unintended repercussions for sustained economic growth, exchange rate stability and future inflation,” he said in his weekly column in our sister newspaper, Daily FT. Commenting on the extremely higher government securities yields which in fact went up rapidly during the last three months in particular, economist Murtaza Jafferjee said such spike in yields is not healthy for an economy.
“This normally should not be happening and is not healthy for an economy when you see such rapid increases,” Jafferjee said. He said such rapid increases in government securities yields could only happen when the underlying inflation is going up fast. But the inflation is hovering around 2 percent and the expectation is 4.7 percent for the year.
“There is something obviously going on in the government’s auction market. When they issue treasury bills and bonds, some activity is going on there that is creating these kinds of huge jump in interest rates,” he further said. Meanwhile Ekanayake said if the Central Bank wants to maintain the annual average inflation at their target range of 3.0 to 5.0 percent, they would have to raise the rates. Amid these circumstances Jafferjee said the economy would slow down.
“My sense is that we are facing a crisis and I hope that we will not waste this crisis but instead make this an opportunity to carry out the necessary structural reforms needed,” he remarked.
Shares jump to 5-week closing highon retail buying
REUTERS: Sri Lankan shares rose 1.3 percent yesterday to a five-week closing high, as local retail investors bought beaten-down banking and diversified stocks while continued offloading by foreign investors amid worries over macroeconomic stability weighed on sentiment
Foreign investors sold a net Rs.226.2 million worth of equities, their fourth straight session of selling, and extending the year-to-date outflows to Rs.2.85 billion. Shares jump... The benchmark share index ended 1.31 percent, or 79.87 points, higher at 6,159.02, its highest close since Feb. 29. At Rs.907.4 million, turnover surpassed this year’s daily average of Rs.793.8 million due to some block deals. “It’s a retail push,” said Prashan Fernando, COO, Acuity Securities.
The market will see subdued trade in the coming days due to the Sinhala-Tamil New Year on April 13 and 14, traders said. Shares of the country’s biggest listed lender, Commercial Bank of Ceylon Plc, rose 2.88 percent while Lanka ORIX Leasing Company Plc jumped 5.46 percent. Analysts said investors are cautious about macroeconomic uncertainty after a rating downgrade and unclear capital gain tax.
Sri Lanka on Friday postponed a plan to reintroduce capital gains tax by six months after the move threatened to dent foreign investor sentiment. Stockbrokers said the concern now is how the government is going to impose the tax, rather than the tax itself. Higher market interest rates and higher borrowing by the island nation facing a balance-of-payments crisis have also weighed on investor appetite for risky assets, dealers said. The average weighted prime lending rate has risen 84 basis points to 9.19 percent since Feb. 19, when interest rates were increased by 50 basis points, Central Bank data showed.
Sri Lankan 5-day rupee forwards rise on remittances, bank dollar sales
REUTERS: Sri Lankan five-day rupee forwards edged up yesterday on dollar selling by banks through exporters and inward remittances ahead of the Sinhala- Tamil New Year, dealers said. The forwards, which act as a proxy for the spot currency and are called spot next, traded at 144.50/75 per dollar at 0630 GMT, firmer from Monday’s close of 146.10/20.
The state-owned bank sold dollars at 143.90 levels, likely on behalf of the Central Bank, to keep the rupee steady, dealers said. The spot rupee, which has not been active since Jan. 27, did not actively trade. The Central Bank has fixed the spot rupee’s trading price at 143.90 through moral suasion, dealers said. Central Bank officials were not available for comment. “Now, the inflows are coming in for the festival season and the Central Bank is holding the rupee, the currency will be at these levels without much pressure,” a currency dealer said. Sri Lankan... Sri Lanka will celebrate the Sinhala-Tamil New Year on April 13 and 14. The one-week forwards, which were hovering near record lows last week, did not actively trade yesterday for the fourth straight session, the dealers said. The rupee has been under pressure due to foreign investors exiting government securities and amid the country’s economic woes. Sri Lanka’s 2015 borrowing jumped more than 25 percent compared with the previous year due to high cost of refinancing loans, raised by the previous government without parliamentary approval, the finance minister said last month.