Economy

StanChart forecasts another rate cut end 1Q

03 Feb 2014 - {{hitsCtrl.values.hits}}

Standard Chartered Bank (StanChart) says the Central Bank is likely to further cut key policy rates if no significant improvement was recorded in private sector credit growth amid falling headline inflation.

“If there is no material improvement in private-credit growth or if inflation continues to fall at end-Q1-2014, there could be a further rate cut.

We think the CBSL is likely to put higher weight on private-sector credit growth,” StanChart said in a recent research on the Sri Lankan economy.

StanChart is of the view that CB is unlikely to meet its private sector credit growth target of 16 percent set for 2014, due to recent rise in bank non-performing assets.

They further said the Nation Building Tax imposed on the banking sector would also have a negating impact on credit growth to a certain extent.

Private credit which peaked 35.2 percent in 2011 met with a huge set back since 1Q12 after the policy tightening measures—particularly with the 18 percent credit ceiling imposed on the banking sector. In November 2013, the private sector credit growth shrank to 7.3 percent.

StanChart, however cautioned on a further easing of monetary policy, as excessive easing might raise the risk of subsequent currency instability.

“Continued easing at this juncture could lead to overheating of the economy further down the line, with subsequent balance-of-payments (BoP) and currency instability risks,” they said.

These conditions were amply visible in 2011-12 when the Central Bank started to cut policy rates aggressively to spur growth. This resulted in a large trade and current account deficits and a sharp 22 percent sell-off in USD-LKR at the beginning of 2012, before the CB intervened by imposing a credit ceiling and hiking rates by 75 basis points.

Hence StanChart as of now wants the Central Bank to keep the rates on hold as there is typically a one year lag before the policy rates start to fuel private sector credit.

After slashing the policy rates thrice during the last 12-months to multiyear lows, the Central Bank Governor Ajith Nivard Cabraal told Bloomberg in January that the rates would be kept unchanged in the coming three to six months.

“There may be some other adjustments that we may need to make in the economy as we move on, but from the rates point of view, it seems appropriate in the current circumstances.

As it is now, there doesn’t seem to be a need for any change, but if we do see any changes, we will be quick to react,” Cabraal was quoted as saying to Bloomberg.

Currently the Standing Lending Facility Rate (SLFR), which replaced the Reverse Repurchase Rate stands at 8 percent, while the SDFR, which replaced the Repurchase Rate stands at 6.50 percent.

Economy

StanChart forecasts another rate cut end 1Q

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