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National Lanka Equities forecast real rates to remain muted for a while and opined stock market reaction to a rate hike as too premature.
In a research note, Nation Lanka Equities said the stock market remained on a weaker footing citing a possible hike in policy rates.
“Despite the decision, Average Weighted Fixed Deposit Rate (AWFDR) has hardly seen an uptick and remained at 5.6% levels due to the banking sector having excess liquidity,” NLE said.
“This has also seen the country moving to low or negative real returns on the back of inflation hovering around 5%.”
It is of the view that even in an event, AWFDR increases by another 100 basis points to 6.5-7%, the real interest rates will remain subdued with inflationary pressure likely rising over 7%, especially after the upward adjustments in essential commodity prices.
“We believe in order to see some shift from equity markets, the real interest rates should at least derive a minimum return of 5% which in turn should see an uptick of closer to 600 basis points in deposit rates, which is highly unlikely in the near-term,” it added.
“Therefore, moving from equity markets right away which has generated over 40% YTD return is thus believed to be unwarranted.”
