Policy easing flattens yield curve across the board

By First Capital Research 

The Central Bank of Sri Lanka, at its meeting held yesterday (21st May), decided to reduce the Overnight Policy Rate by 25bps to 7.75%. The CBSL stated that; “this measured easing of monetary policy stance will support steering inflation towards the target of 5%, amidst global uncertainties and current subdued inflationary pressures”.

Following the monetary policy announcement, participants in the secondary market responded positively, with buying interest emerging in the market. As a result, the yield curve declined by an average of c.10bps across the board.

Consequently, amongst the traded maturities, the 15.02.2028, 15.03.2028 and 01.07.2028 maturities traded inthe rates of 9.57% to 9.75% while, 15.10.2028 and 15.12.2028 traded between the rates of 9.72% to 9.80%. 

Further ahead of the curve, 15.06.2029, 15.09.2029, and 15.12.2029 traded between the rates of 10.05% to 10.15%. Finally, going ahead of the curve, the 15.03.2031, 01.10.2032 and 01.11.2033 maturities were seen changing hands at the rates of 10.55% to 10.85%. 

In the forex market, the LKR appreciated against the greenback, closing at Rs. 299.8/USD, compared to the previously seen rate of 300.6/USD. Meanwhile, overnight liquidity in the banking system expanded to Rs.173.7bn from Rs. 163.2bn in the previous session.