CBSL gears itself for loosening of monetary policy

Given the effectiveness of tight monetary policy and the government’s success in renegotiating credit, the Central Bank (CBSL) has changed the computation of the Advance Bank Rate. From November 3 onwards the Licensed Central Banks will be able to obtain extraordinary loans from the Central Bank at a rate of 700 basis points over the Average Weighted New Deposit Rate.

With immediate reductions expected in fish prices alongside otherwise downward revisions in milk, sugar, and baked goods there is expected to be a downtick in inflation. The economy shall also see the beginning of the deflationary impact of the previously implemented monetary policy.

Government finances are also expected to improve sharply with the advent of the new Inland Revenue Bill and the upcoming budget. The banking sector is also expected to benefit from the better servicing of loans to state-owned enterprises with the advent of price revisions. The Ceylon Electricity Board is expected to show considerable improvements in financials amidst the large hydropower generation. The Ceylon Petroleum Corporation is also expected to be operating profitably.

The depositor base is happy with the current savings rates offered. The Net Interest Margins of the banks can continue at above-average rates for longer periods. It is expected that if the ISB restructuring forces the recapitalization of the banking sector the impact will be minimal.

Locally issued and LKR-denominated debt is unlikely to be restructured.

The move also comes as the Central Bank and government are expected to make immediate assurances that the short-term Treasury bill stock will be exempt from restructuring. The move is expected to be time bound with assurances being given forward-looking assuring the full payment of upcoming auctions. This will improve participation by funds currently lying idle at the overnight facility of the Central Bank.The dollar liquidity problem of the banking sector is also expected to be improved with the rising remittance and tourism receipts in the coming quarters.

The government is also expected to finalize some sales of assets to foreign parties. Given the profitability of key counters in the stock exchange and the prolonged Russia-Ukrainian conflict, there are expected to be broader inflows in the domestic capital markets. The country’s economic resurgence shall be a key driving factor of foreign inflows. With the advent of the Trincomalee tank farm and the construction phase of the Colombo Port City project there is expected to be a rise in dollar financing from both China and India. (DP)