Wednesday, 19 February 2014 00:51
Change could happen if credit growth misses target or inflation picks up, but warns it could lead to future overheating; remains neutral on T-Bond outlook
Standard Chartered predicted yesterday the Central Bank will adopt a ‘wait-and-see’ approach after holding rates steady, but warned the situation could change if credit growth fails to hit double digits or inflation spikes.
Releasing its Economic Alert hot on the heels of the Central Bank policy report on Monday, the bank saw no surprises but warned that a further rate cut could narrow the policy rate corridor. “We expect the Central Bank to remain in wait-and-see mode, and believe that only significant weakness in economic data will trigger a further rate cut.
If private credit growth fails to approach double digits or if headline inflation continues to fall by end-Q1-2014, this could trigger a further rate cut,” the report said.
If the CBSL decides to cut rates further, Standard Chartered noted it could potentially narrow the policy rate corridor further (by cutting the SLFR, while leaving the SDFR unchanged), based on the Central Bank’s statement that longer-term lending rates have room to decline further.
“As the policy announcement was in line with market consensus, the response of the Treasury bond (T-bond) market was muted. We think T-bond yields will remain range-bound in the near term as expectations of a policy rate cut offset the impact of expensive valuations. We remain neutral on the T-bond outlook.”
The report was also somewhat upbeat on the first, economic data showing signs of improvement.
“Private credit growth is starting to stabilise – the year-on-year growth rate rose to 7.5% in December 2013 from 7.3% in November. Although this is still significantly below the Central Bank’s target of 16.0% by year-end, it shows some improvement. Furthermore, a halt in the easing cycle would be pragmatic at this point given that private credit growth tends to respond with a lag to easier liquidity.”
The report also warned continued easing at this juncture could lead to an overheating of the economy further down the line, raising balance-of-payments and currency instability risks.
“On another positive note, external sector data surprised to the upside in December; exports grew a healthy 13.2% year on year, while import growth remained subdued at 2.1% year on year. This caused the monthly trade deficit to narrow to US$ 565 m from US$ 616 m in November.”