Macro Analysis /
Sri Lanka

Sri Lanka: Rates on hold; tight policy stance by year end highly likely

  • Rates unchanged following January rate cut

  • Credit growth shows marginal uptick despite low rate environment

  • Inflation to pick up on demand pull and cost push inflation

Asia Securities
5 March 2020
Published byAsia Securities

The second MPR for 2020 by Sri Lanka's central bank was held yesterday, where rates remained unchanged following the 50bps cut in January. SDFR currently stands at 6.50%, and SLFR at 7.50%. 

Our key takeaways are: 1) credit growth to slow down on COVID-19 impact, 2) fiscal loosening to help boost overall growth, 3) headline inflation to breach CB’s target range in 2020 and 4) higher probability of a tight monetary policy towards year-end. 

We maintain our GDP growth forecast of 4.0% for 2020 and 4.4% YoY for 2021 but, note that this could be revised downward on a prolonged COVID-19 impact on major trading partners. 

We maintain our currency forecast of USD/LKR 189.00 for 2020 (4.3% depreciation) and USD/LKR 195.00 for 2021. 

We view the loose fiscal policy measures taken by the government as a short-term positive for GDP growth and overall consumer sentiment. However, concerns for the medium-term include: 1) absence of a medium-term policy framework for the govt’s revenue-generating policies; and 2) borrowing requirement of ~USD 3.0bn per year from 2020-2024.