COLOMBO Sri Lanka's central bank is likely to continue to ease monetary policy, as it seeks to boost economic growth and lower borrowing costs for the government in the crisis-hit economy.
In a sign of confidence that Sri Lanka's financial crisis is over, its central bank surprised markets on Thursday with its first rate cut in three years, signalling a change of course to fuel a rebound in the economy.
In a snap poll conducted on Friday, all ten economists and analysts said they now foresee further rate cuts in the coming months starting as early as August, with the majority expecting interest rates to end the year at 10 per cent - 11 per cent from 13 per cent - 14 per cent now.
The nation's economy collapsed last year as its foreign exchange reserves ran out, food prices spiralled and protesting mobs forced the removal of the country's former president.
Inflation easing at a faster rate than anticipated and sustained dollar inflows in recent months have likely given the CBSL an opportunity to embark on a loosening cycle earlier than anticipated and start mending economic growth, analysts said.
We also think CBSL is eager to push market yields lower, to ease the pressure on the financial sector, Citi Bank economists wrote in a note.
This could be indicative of the likely need to pursue some domestic debt restructuring via the treasury bonds, which we think would help advance negotiations with foreign creditors, they said.
Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund of the IMF in March and plans to complete the restructuring debt talks by September.
The central bank's rate adjustments will also aid it manage borrowing costs and compliment domestic debt restructuring decisions, said Dimantha Mathew, head of research at First Capital.
With no inflation risk the central bank will lower rates aggressively to drive demand and target growth. In 2023, the CBSL expects Sri Lanka's GDP to contract by 2 per cent, slightly better than the 3 per cent contraction forecasted by the IMF.
Five analysts had backed CBSL and IMF estimates, two said Sri Lanka would perform better and one forecast a steeper contraction of 4.8 percent.
The IMF's Deputy Managing Director Kenji Okamura, who wrapped up a visit in Colombo on Wednesday, said the country is showing a strong commitment to implementing economic reforms but must continue this momentum even in a challenging economic environment. Sri Lanka will begin rolling back import restrictions on 300 - 400 items from next week, according to a statement from the finance ministry.
The island has introduced import bans on various items such as vehicles, cosmetics, and alcohol in March 2020 but slowly eased them since last year.
Acuity No change 50 bps cut 300bps cut No - 2 per cent
Advocata No change to 100 bps cut No change to 100 bps cut 2 per cent to 3 per cent
First Capital No change of 500 bps cut No change No - 4.8 per cent
No change 50 bps cut 300 bps cut No - 0.5 per cent to - 1 per cent
The University of No change of 500 - 250 bps cut No change of 100 - 200 bps to 3 per cent
No change, 200 bps cut. No change, 100 bps - 2 per cent.
Citi Bank has lowered its short-term cut to 150 bps.