CBSL expected to hold rates as credit surge, external pressures limit policy space: FCR

• First Capital assigns 60% probability for CBSL to keep policy rates unchanged tomorrow 
• Only a 40% chance seen for a rate cut, with most weight on a 25 bps reduction
• FCR says strong credit growth, weak reserves and currency pressure argue against easing
• Case for a cut rests on slowing economic momentum, low inflation and high SME borrowing costs

First Capital Research expects the Central Bank to keep policy rates unchanged at tomorrow’s monetary policy review, saying current macro conditions do not justify easing. It assigned a 60% probability to the policy stance being maintained, alongside a 40% likelihood of a rate reduction. 

FCR sees a 30% chance of a 25-basis-point cut and a 10% chance of a deeper 50-basis-point reduction. It also estimates an 80% probability of the Statutory Reserve Ratio remaining unchanged, with a 20% chance of a 100-basis-point increase in response to improving liquidity.

FCR argues that a rate cut would be difficult to justify amid accelerating private-sector credit, which jumped by Rs. 236.3 billion in September alone, pushing year-to-date credit expansion above Rs. 9.5 trillion. 

Lending to the private sector rose 23.6% year-on-year in September, while survey indicators point to continued momentum into the fourth quarter. 

The firm says a policy cut risks fuelling further import demand, particularly for vehicles, and adding to emerging current-account pressures after Sri Lanka recorded a deficit in September following eight months of surpluses.

External stability concerns also weigh against easing. Official reserves slipped to $ 6.21 billion in October, providing about three months of import cover, while near-term outflows of $ 316 million in November and over $ 2 billion in the next three months pose additional pressure. 

The rupee has depreciated 5.4% so far this year, including 1.6% since mid-October, driven by seasonal import demand and vehicle-related FX pressures. FCR says a policy cut could weaken the interest-rate differential and heighten exchange-rate volatility.

Tight liquidity conditions further limit the effectiveness of easing. The Average Weighted Call Money Rate has remained above the policy corridor mid-point, averaging 7.94% against the Operational Policy Rate of 7.75%, as system liquidity recently fell to Rs. 87.6 billion. 

Under these conditions, FCR expects little downward response in interbank rates even if the Central Bank cuts policy rates.

The case for relaxation is centred on easing economic momentum. GDP expanded 4.8% in the first half of 2025, but FCR expects growth to moderate as only 35% of the Rs. 1.3 trillion public investment allocation has been utilised so far this year. 

Household consumption is also expected to soften under elevated taxes and weak income growth. 

Inflation remains subdued despite turning positive in August; headline CCPI inflation was 2.1% in October and is expected to average below the Central Bank’s 5% target through 2026. FCR notes that subdued demand gives the Central Bank room for a small rate cut if needed.

Another argument for easing is the high cost of credit for SMEs. The Average Weighted SME Rate stands at 10.5%, well above the AWPR at 8.4%, constraining credit access for a sector that accounts for over half of GDP. 

With the proposed removal of the Social Security Contribution Levy on financial services from January 2026 expected to reduce intermediation costs, FCR says the Central Bank may adopt a wait-and-see approach rather than adjusting rates immediately.

Global conditions also favour accommodation. Fitch Ratings expects global growth to slow to 2.4% in 2025, the weakest pace since 2008 outside crisis periods, while major central banks, including the US Federal Reserve, have already begun cutting rates. 

FCR says the CBSL may consider aligning with the global easing cycle if domestic conditions allow, but for now, macro-financial stability remains the priority.