Loose monetary conditions to prevail, says Softlogic Stockbrokers

• Softened economic activity may warrant further stimulus
• Opines there is more room for further reduction in lending rates
• Credit growth to pick up in 2021 but mass recovery in credit may get pushed back to 2Q 2021

With policy rates unchanged last week, loose monetary conditions are expected to prevail to spur economic growth, predicts Softlogic Stockbrokers in a research note. 

“We expect CBSL to maintain loose monetary conditions going into 2021 as 1) output gap remains negative, 2) inflation being under control, 3) manageable pressure on exchange rate and 4) restrictive fiscal capacity to provide stimulus,” the broking firm said.

The eighth monetary policy review for 2020 was held last week where policy rates were left unchanged despite the subdued economic activity as a result of the second wave. Accordingly, the SDFR and SLFR will remain at 4.5% and 5.5% respectively.

Softlogic Stockbrokers said the surge in COVID-19 cases may delay the recovery in the near term, hence loose monetary conditions may continue to aid long-term growth post 1Q 2021.

“We believe the recent virus outbreak may hinder economic performance in the near term until the virus settles or a vaccine is introduced. Softened economic activity may warrant further stimulus in the forthcoming periods,” it said. 

“However, monetary policy transmission efficiency may remain stalled until investor confidence ‘resets and reshapes’ to an economy functioning amidst the pandemic. CBSL may focus on transmission efficiency now more than ever, as the bank may run out of avenues to stimulate the economy in the event the sensitivity of policy rates dries down,” Softlogic said.

With the view of extending credit to the private sector, CBSL expressed its intention to introduce interest rate caps (at 7% per annum) on mortgage backed housing loans for salaried employees and lending targets to identified sectors.

Softlogic Stockbrokers said whilst commercial bank lending rates continued its downward momentum there was more room for further reduction.

It said in response to the monetary easing measures to bring down interest rates, both market deposit and lending rates adjusted downwards during the post lockdown period. CBSL expects further reduction in lending rates given the excess liquidity and historic low policy rates.

“Revival in net credit disbursements in two consecutive months (Rs. 78 billion in Aug-2020; Rs. 87 billion in Sep-2020) and continued momentum in Oct-2020 (Rs. 59 billion) despite the fears of the second wave, proves the effectiveness of the monetary policy to a greater extent,” Softlogic Stockbrokers opined. 

“However, disbursements may have been hampered in November 2020 due to the virus outbreak which insists loose monetary conditions,” it added.

Average Weighted Prime Rate (AWPR) continued its downward trend with the rate falling 342 basis points since March (start of the islandwide lockdown) and 56 basis points since the last monetary policy meeting. Furthermore, private sector credit continued its momentum in October despite the outbreak of the virus.

With regard to inflation, Softlogic Stockbrokers said prices were hovering around the lower bound of CBSL’s target with further buffer to loosen the stance.

October CCPI inflation stood at 4% YoY on par with the lower bound of CBSL’s inflation target. Inflation in the near term may hover around the lower bound as it expects economic activity to be subdued due to the recent COVID-19 outbreak, it said. 

“While we expect credit growth to pick up in 2021 on the back of CBSL’s loose monetary conditions, we expect the virus outbreak to slowdown the momentum of credit recovery. Hence, the mass recovery in credit may get pushed back to 2Q 2021E as the virus settles or a vaccine is introduced,” Softlogic Stockbrokers said.