Weak economic indicators may force tighter monetary policy
In 1H-2022, the extremely weak economic indicators may force the Monetary Board to further tighten monetary policy. Thereby, FC Research expects two rate hikes in 1H-2022 while one rate hike was already announced in January-22.
“In 2H-2022 we expect one more rate hike to take place to balance the overall economic outlook. Cumulatively, we expect 3 rate hikes for 2022,” According to FC Research Investment Strategy 2022. Resulting from the uncertainty over access to creditors, continued high budget deficit and negative liquidity, 1H-2022 bond yields are likely to rise by 150bps-200bps and in second half, a further 100 bps-150 bps upside is expected; But with no IMF or inflows, yields could just skyrocket. Altogether Bond Yields are expected to rise sharply by 250-350bps within the period 1Q2022 – 4Q2022.
In January 2022 policy rates were increased again while a significant negative liquidity portion continued. Demand for private sector credit is also continuing at a similar pace. With the expected rise in bond yields, FC Research expects AWPR to follow a similar suit with a similar accelerated pace as witnessed in 2H-2021 to reach 10.0%-11.0% by June-22 and 11.0%-12.5% by December-22.
“Taking the weak macro situation into consideration, we expect a strong depreciation of the currency over the forecasted period. We further downgrade our January-22 target from Rs 225-240 to Rs 230-245 while targeting Rs 240.-270 for December-22.”
With strong Dec-21 earnings and negative real interest rates, we expect ASPI returns to be strong in the shorter term resulting in the ASPI potentially rising to the 15,000 mark within 1Q2022.
“ We believe that Sri Lanka could be in for a major shock within the next 3-12 months, thereby, our long-term view is to reduce risk by aggressively shifting to defensive counters while we expect possible negative return in the broader market in 2H-2022.”