Expects downtrend in lending rates during 1H2024

Investment Strategy – Jan 2024 report released by First Capital Research says reforms will stay the course amid guesses and opinions on upcoming elections.”After announcing the rate cut in Nov-23, we expect the Central Bank of Sri Lanka (CBSL) to take a pause and maintain rates in the near future, paving way for market rates to adjust downward. However, CBSL plans on implementing a single policy rate window, we believe CBSL may implement it in the 1Q2024 via a rate cut to the SLF (standing lending facility ) reducing it to 9.0% to be in line with the SDF (standing deposit facility),” First Capital Research (FCR) says.

They further said:

“With the completion of external debt restructuring during 1H2024, we believe the overall yield curve is likely to drop below 13.5% and reach a range of 11.0%-13.5% in the short term and towards end of1H2024 to reach 10.0%-12.5%. AWPR may decline to 10.0%-12.0% by Jun-24 and rise again to 11.0%-13.0% by Dec-24.”

“We expect the downtrend in AWPR to continue and reach a low of 10.0% – 12.0% during 1H2024, but with the stronger demand for credit and the pick in the economy with the gradual rise in SME segment and inflation, we expect slight pressure on interest rates pushing AWPR to 11.0-13.0% during 2H2024.”

“Exchange Rate outlook upgraded to LKR 310.0-330.0 for 1H and LKR 320.0-340.0 for 2H2024”.

“FCR outlook for 1H2024 for the LKR has been upgraded with potential appreciation pressure as the newly implemented higher taxes are likely to significantly slowdown the rising consumer demand in the short term supported by the rise in cost of living resulting in LKR appreciating to a range of 310.0-330.0. LKR may register depreciation pressure amidst the growth in the economy as we target a range of LKR 320.0-340.0.”