CB seen holding rates, SRR steady – Reuters poll

The Central Bank will convey its latest stand on monetary policy on Friday and a Reuters poll speculated that it will hold policy rates steady.

“The central bank is expected to keep its repurchase and reverse repurchase rates steady at 7.00 percent and 8.50 percent respectively, their lowest levels in more than seven years, for a 13th straight month, according to 14 out of 15 analysts polled by Reuters. One analyst expects a 50 basis points (bps) hike in both rates,” Reuters said.

The Statutory Reserve Ratio (SRR) is expected to be left steady at 8 percent, according to 12 analysts. One expects the central bank to cut it by 100 bps, while two expects a 50 bps increase.

FACTORS TO WATCH:

The steps the central bank will announce as ‘new measures’ to change the structure of the economy and cool down continuing high credit growth.

Implications for post-war investor confidence after Sri Lanka turning down the remaining $800 million of a $2.6 billion loan after the global lender repeatedly requested the central bank to allow flexibility in the rupee exchange rate.

How long the central bank can maintain the exchange rate at the 113.90 level. The central bank has already spent over $2.6 billion to keep depreciation at bay since July last year.

Interest rates. Market interest rates have already increased between 117-172 basis points since Nov. 21, largely after the devaluation, making local borrowing expensive, which may help reduce demand-driven inflation.

Economists and analysts say the central bank has been overly optimistic in targeting $25 billion in inflows this year and 8 percent economic growth along with record exports earnings and remittances in 2012, since the country’s main export markets Europe and Middle East are in turmoil.

Private-sector credit growth at a 17-year high of more than 30 percent year-on-year since March. It hit 33.5 percent in November, much higher than the central bank’s year-end estimate of 27 percent. The central bank wants to slow it to 16 percent by the year’s end.

MARKET IMPACT:

The stock market, which is on a sliding trend due to credit concerns, may be affected if the central bank’s new measures squeeze liquidity and make borrowing expensive, while money market rates may rise as liquidity is expected to remain tight.

If the new policy measures increase market interest rates, investors may move their funds to fixed deposits from equities.

The central bank will have to pump more dollars from its reserves if rates are kept on hold as low rates could encourage importers to step up overseas purchases and boost dollar demand. However, dealers say declining reserves are beginning to test the central bank’s ability to defend the rupee.

Following are the poll’s forecasts for where rates will be after Friday’s announcement:

Repot Reverse repo SRR

(in pct) (in pct) (in pct) Median 7.00 8.50 8.00 Average 7.03 8.53 8.00 Minimum 7.00 8.50 7.00 Maximum 7.50 9.00 8.50 No. of analysts 15 15 15

NOTE: Analysts from the following institutions participated:

HSBC, Citibank, National Development Bank, Asia Capital, Nations Trust Bank, Commercial Bank of Ceylon, Hatton National Bank, People’s Bank, Bank of Ceylon, Standard Chartered Bank, SC Securities, CT Smith Stockbrokers, TKS Securities, MAS Capital and Frontier Research.