LNP – Rising bets for Central Bank to stay pat on current rates at upcoming policy meeting

The Central Bank is set to keep the rates when it meets for the second time for this year, this week, to decide on the key policy rate, after it left the overnight policy rate (OPR) unchanged at its January meeting. 

In January, the Central Bank cited limited price pressures and in fact, the deepening deflationary conditions, declining interest rates and recovery in the economy, which was taking place at a robust pace.

At the first policy meeting held for 2025, the Monetary Policy Board of the Central Bank left the key policy rate – OPR – at the 8.00 percent level – the level it set back in November last year, when it shifted to the single policy rate from the hitherto existed dual policy rates.

The banks’ statutory reserve ratio (SRR) was also left at 2.00 percent. The SRR is the amount of money maintained with the Central Bank by the licensed banks from their deposit liabilities.

Meanwhile, First Capital Research, in its customary pre-policy analysis, expected the Central Bank to keep its policy rates unchanged at its upcoming meeting this week. It assigned an 80 percent probability for such a scenario while the balance was split between a cut of 25bps and 50bps.

Its expectation for the policy rates to be left unchanged is premised on several factors, from the slow reserve build up, on the back of the settlement of International Sovereign Bond-related coupon payments to higher imports, partly coming from the vehicles, to the possible slowdown in the collections of foreign currency from the remittances and tourism trade, the latter entering the off-season.

It also noted another rate cut is unnecessary to accelerate growth in the economy, as the budget spending, specially the largest spending allocation on capital expenditure, followed by the announced salary increments to the public sector employees and pension adjustments, amid the increased Aswesuma benefits to the low-income families disproportionately affected by the economic crisis.

First Capital also cited the already strong growth seen in the private sector credit, despite the January contraction by Rs.4.6 billion, due to the seasonality and also the still subdued foreign activity, which has still failed to receive a fillip from the sovereign rating upgrades in December 2024.

“Going forward, we expect foreign investors to remain sidelined for the foreseeable future, as investors continue to assess new developments. However, in an event where central banks, including the US and Europe, continue to reduce interest rates (as expected towards 2H2025), we believe opportunities may arise for investment into government securities by foreign investors,” it added.

Meanwhile, First Capital saw only a limited number of reasons for why the Central Bank should ease the rates further. They are the continuous improvement in the overnight and outstanding liquidity in the domestic money market and also the increased spread in the yield curve. “Given the increased levels of liquidity in the system, together with the subdued demand from the SME and micro business segments, we believe another rate cut may accelerate the demand for credit and provide a further boost to the GDP growth,” it said.

“… considering the substantial levels of liquidity available in the system, with the aim of taking advantage of the lower rates, we believe a rate cut is possible in order to bring down the long-term rates, enabling the Central Bank and government to collect funding at cheaper rates,” First Capital said referring to the widening spread between the shorter and mid-tenures of the yield curve while both the belly and tail end of the curve remaining unchanged.