CBSL’s historic rate hike double blow to economy: Econsult

Monday, 7 March 2022 03:45 - - {{hitsCtrl.values.hits}}

100 basis points rise; sharpest increase since January 2001 and second in three months
Econsult warns move would cause vicious cycle as hike will push up input costs for productive economy and higher costs will be passed down to consumers as higher prices
Places significant downside risk to SMEs and corporates who are still highly leveraged

Research firm and think tank Econsult says Friday's rate hike by the Central Bank by 100 basis points is a double blow to the economy.

“Increasing interest rates for external shocks is a double blow to the economy in the current environment,” Econsult argued as the CBSL move pushes up input costs (i.e. raw material, printing, shipping, packaging, energy, transport etc).

“While the cost of financing of all local industries involved in production too will in turn rise, these higher costs will be passed down to consumers as higher prices causing a vicious cycle,” Econsult opined.

It also observed that the current tightening monetary policy places great risk to the future investment climate and economic growth of Sri Lanka.

The CBSL was seen tightening its monetary policy stance by increasing its policy rates by 100 basis points, the sharpest increase since January 2001 and second since January this year.

Econsult also said the move places significant downside risk to SMEs and corporates who are still highly leveraged.

Further it said any new capital investments will now become costly with Steepning of the yield curve.

As firms are now less incentivized to make investments into production as the NPV of these investments fall or be negative.

Econsult also said “Sri Lankan company Balance Sheets are still fragile and revenue growth remains weak (given declining GDP since 2015 and in 2020). “The hike will push up financing costs, retard balance sheet growth and in turn decline output,” it opined.

It pointed out that banks are already facing high NPLs and rescheduling of already distressed loans will see a further increase in non-performing loans and capital losses. “This will push further capitalisation of banks in a market already unable to access US$ and LKR liquidity. This will cause banks to become risk off and reduce long-term loans needed for the production economy,” argued Econsult.

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