Sunday Dec 22, 2024
Sunday Dec 22, 2024
Friday, 20 August 2021 04:05 - - {{hitsCtrl.values.hits}}
Softlogic Stockbrokers Ltd. yesterday said that the Central Bank must check money printing to ensure its latest monetary policy measures deliver desired results.
“While we believe that tightening rates would somewhat curtail inflationary pressures, it should be noted that if Government continues its money printing spree, the resulting inflation would be a counterincentive to the monetary policy changes. Therefore, it may not permit inflation to subside to the expected levels,” Softlogic said.
It said the better-than-expected recovery in private sector credit may continue despite the tightening, as the sentiment recovers with the rapid vaccination drive in place. “We believe that interest rates may still remain below the pre-pandemic levels in 2H 2021E, driving sustainable credit and economic growth,” Softlogic said.
It also believed that yields may adjust 150 bps in 2H 2021E in the wake of a tightening cycle while having negative liquidity even before the upward adjustment in SRR, which comes into effect on 1 September.
“However, we expect sporadic liquidity injections from the Central Bank which may lead to a gradual increase in yields instead of sudden one-off spikes. The call money rate which hovered around the lower bound has shot up starting June indicating the early signs of yield adjustment,” the broking firm said in a research note.
From the equity perspective, Softlogic Stockbrokers believes higher volumes to continue in the next 6-10 months as deposit rates remains low in comparison to the inflationary pressure, resulting in a low real-interest rate among fixed income sources. Given the dominant retail activity in equity markets, we believe the market would be more sensitive to deposit rates rather than G-sec yields in the near term.
“As deposit rates adjust with a 6-10-month lag compared to G-sec yields and backed by the fact that interest rates would still remain significantly lower compared pre-pandemic rates (even after a 150 bps adjustment), we believe higher volumes in equity market to persist at least for six months,” Softlogic added.
CBSL yesterday announced to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank by 50 basis points each. Furthermore, the Statutory Reserve Ratio (SRR) was raised by 200 bps to 4%. The domestic as well as the external instabilities were stated as the reasons for such decisions.
CCPI Inflation continued its upward trend starting April, reaching 5.7% in July, indicating the possibility of breaching the stipulated ‘6%’ upper bound of the central bank. Increased money supply, currency depreciation, money printing and lower interest rates cumulatively brought on significant inflationary pressure on the economy, showing signs of exceeding the CBSL’s target.
