Monday, 28 April 2014 00:03
Upside risks to inflation increase the likelihood that it will keep rates on hold for longer
Private credit growth continues to slow, while external sector performance is strong
Policy announcement is in line with the rates market’s expectations
Stays Neutral on T-bond outlook; foreign inflows to T-bonds and T-bills also remain supportive of the rates market
The Standard Chartered Bank (SCB) expects the Central Bank largely to hold policy rates intact despite multiple challenges.
“We expect the CBSL to keep rates on hold for now. It is likely to consider a policy change in mid-Q3 if private credit growth fails to pick-up by end-Q2 and inflation remains low. The Central Bank will likely hold rates steady even if these two conditions are met, if GDP growth remains strong, as in Q4-2013,” SCB said.
“On balance, upside risks to inflation increase the likelihood that rates will remain on hold for longer,” SCB added, in a global research economic alert following CB’s last week move to keep policy rates unchanged.
SCB said the CBSL’s decision to maintain its status quo on policy rates is in line with the rates market’s expectations. The Standing Deposit Facility Rate (SDFR) was maintained at 6.5% and the Standing Lending Facility Rate (SLFR) at 8.0%.
Inflation currently stands at the lower end of the central bank’s 2014 target range of 4.0-6.0% (4.2% in March). “We expect the current drought to push food inflation higher during the summer months and then again after the secondary Yala rice harvest towards year-end,” SCB said.
However, due to a favourable base effect, headline inflation is likely to remain in the mid single digits through most of the year, crossing 5% only in September.
SCB said upside risks to inflation stem from a potential El Niño effect materialising during the summer, or another electricity tariff hike in light of the drought.
On the growth front, SCB said the monetary policy review revealed that private credit growth continued to slow to 4.4% in February from 5.2% in January. “The CBSL expects an improvement on this metric only from Q2 onwards. On the other hand, the external sector’s performance continues to be strong,” SCB said.
Exports grew by 23% y/y in January, while imports grew by 8.0% y/y. At USD 756mn, the trade deficit is narrower than in January 2013. “Although down from their all-time high in December, monthly remittance inflows were strong at $ 555.5 m in January (growth of c.11% y/y),” SCB said.
SCB also expects T-bond yields to remain range-bound (the 5Y yield between 9.0% and 9.3%), and hence maintain its Neutral outlook on T-bonds.
“While a likely pick-up in food inflation is a concern, stable policy rates amid slowing private credit growth is positive for T-bonds. Foreign inflows to T-bonds and T-bills also remain supportive of the rates market, with inflows worth c.$ 130 m during 2014 YTD,” SCB added.