Jan 28, 2020 (LBO) – First Capital Research assigns 80 percent probability for no change in policy rates amidst recently provided tax revisions and other benefits.
Considering the recent major fiscal and monetary policy changes, First Capital Research believes that current accommodative monetary policy stance is appropriate, and that there is ample space for market lending rates to reduce without further adjustment in policy rates.
Already announced tax relief, and proposed moratorium on capital repayments of bank loans for the SME sector are likely to provide further impetus to the economy.
"We assign 80 probability for no change in policy rates in the upcoming policy announcement and expect policy rates to hold in the 1Q 2020," FCR said in a research note.
"However, we assign a lower probability of 20 percent for a rate cut in Jan 2020 with the urgency to boost the revival of economic activities. We continue to maintain that SRR is likely to remain at the current level."
Foreign inflows despite outlook downgrading for Sri Lanka
Following a similar path to Fitch, S&P recently revised its rating outlook on the Sri Lanka sovereign credit to negative from stable on the view that larger than expected fiscal deficit and concerns over indebtedness.
Despite the negative rating outlook revision, the government securities market witnessed a net inflow since the beginning of the year 2020 amounting to nearly 5.5 billion rupees and is expected to gradually improve during the 1Q 2020 with the settling of the political uncertainty to a certain extent.
However, the government’s ability to bridge the revenue loss due to the recent tax revisions will be a concern leading to a risk in 2020.
The stimulus package may potentially lead to fiscal slippage, reducing the possibility of further monetary easing in the near term.