The central bank held its sixth MPR for 2019 today, where the SDFR and SLFR were left unchanged, in line with our expectations. SDFR now stands at 7.00%, and SLFR at 8.00%. Our key takeaways are: 1) no further rate cuts expected in 2019, 2) credit growth to pick up gradually by end 2019, and 3) inflation to remain stable on slowing aggregate demand despite rising food inflation. We maintain our GDP growth forecast of 2.5% for CY19E and 3.8% for CY20E. We maintain our currency forecast of USD/LKR 181.00 for CY19E (1.0% YoY appreciation) and USD/LKR 185.00 for CY20E (2.2% depreciation).
Rates remain unchanged following recent policy measures
Key policy rates were left unchanged following the 50bps cut in August. The loose monetary policy stance taken so far this year, combined with liquidity injections from a lower SRR have resulted in 1) AWPLR declining by ~138bps YTD and 2) bond yields shaving off ~280bps YTD. Meanwhile, average overnight repo rates were down from 7.65% in August to 7.42% in September, while overnight excess liquidity averaged at LKR 23bn so far in October, up ~75.3% MoM. While in our view, the impact of monetary policy changes implemented so far is yet to take full effect, we expect the lending caps implemented by the Central Bank to also impact credit growth positively, albeit at a slower pace than required.
Credit growth continues to decelerate; uptick expected towards end 2019
Private sector credit growth continued to decelerate, recording a 7.2% YoY growth in August (+7.7% in July), the lowest levels recorded over the past three years. SoE credit growth picked up to 16.8% YoY (+14.6% YoY in July) but remained below its 5-month average of 18.7%. We expect credit growth to pick up modestly towards the end of 2019, with improved business sentiment combined with lower interest rate caps imposed in September. However, we do not expect this to be a significant pickup and forecast private sector credit growth to come in at ~5.5%-6.0% YoY by year end.
Inflation to remain stable; prolonged drought a concern
The CB expects inflation to remain within the 4.0%-6.0% range on lower inflationary pressure. We expect a negative impact on food prices owing to the drought conditions experienced in some provinces which is evident with higher food inflation. While our channel checks confirm that the drought has not had a negative impact on paddy cultivation, the dry weather in the Southern coast and the Eastern province has impacted coconut cultivation. However, given the reversal of this trend, we expect inflation to come in at 4.8% YoY in 2019E.