Wednesday, November 18, 2009

Benchmark yields down further Policy rates slashed

Benchmark yields down further
Policy rates slashed

The Monetary Board slashed policy interest rates as expected and as a response benchmark Treasury bill rates tumbled further at the primary auctions last Tuesday—the Central Bank wanting to stimulate economic growth bank dealers said would take sometime to happen.

At a meeting held on Tuesday, the Monetary Board of the Central Bank decided to reduce policy rates, bringing down the repurchase rate by 0.50 percent to 7.50 percent and the reverse repurchase rate by 0.75 percent to 9.75 percent.

"Benign inflation has enabled the Central Bank to gradually relax its monetary policy stance on several occasions in order to support economic activity," the Central Bank’s Monetary Policy Review for November said.

"Accordingly in 2009, the Central Bank lowered its policy interest rates in several steps, abolished the penal rate as well as lifting the restrictions on access to repurchase and reverse repurchase standing facilities," the Central Bank said.

The repurchase window is where commercial banks place their excess rupees with the Central Bank, while the reverse repurchase window is accessed to cover liquidity shortfalls.

So, with the latest rate cuts, commercial banks could earn 7.50 percent on their excess rupees held with the central Bank while borrowings would cost 9.75 percent.

"Market interest rates have declined in response to these measures, albeit with a time lag. Benchmark yield rates on Treasury bills of all maturities have declined by 960-969 basis points, with 91-day, 182-day and 364-day maturities declining to 7.73 per cent, 8.80 per cent and 9.56 per cent, respectively at the auction held on 11 November 2009," the Central Bank said.

Dealers said these rates fell last week as the market anticipated the Monetary Board rate cut (see Island Financial Review of Saturday November 14, 2009).

Treasury bill rates fell further at yesterday’s auction, with primary dealers bidding up to Rs. 31 billion of which the Central Bank accepted Rs. 10.7 billion. Therefore, 91-day, 182-day and 364-day maturities declined further to 7.25 percent, 8.33 percent and 9.17 percent respectively.

The Central Bank said commercial bank lending rates have also started to decline sharply with the reduction of interest rates by state banks, but commercial banks are only attempting to lend to priority sectors and have not really made enough adjustments as much the Central Bank would like.

"Significant absorption of foreign exchange by the Central Bank has led to a high level of excess rupee liquidity in the domestic market," the Central Bank said.

This excess liquidity positions are undesirable as they lead to inflation expectations, which dealers said was worse than actual inflation itself therefore necessitating the Central Bank to use the tools available to it to mop up this excess liquidity—which ranged between Rs. 15 billion to Rs. 20 billion daily.

"With the retirement of a significant proportion of the Central Bank’s holdings of government securities in August 2009, the Central Bank has resorted to issuing Central Bank securities since October 2009 and foreign exchange SWAPs since November 2009 to absorb the excess rupee liquidity in the domestic market," the Central Bank said.

Dealers said US$ 64 million had been transacted through SWAPs this week.

"Through these measures, the Central Bank will continue to manage the excess liquidity situation in the domestic market and take appropriate measures to reduce the level of excess liquidity to a more desirable level," it said.

The domestic banking sector is infused with excess liquidity, policy interest rates and the Central Bank penal rate applicable to banks is also abolished but lending is still not picking up, as the primary auction for government Treasury bills this week indicates, banks still feel government securities is a safer place for their rupees rather than lending them to where it is needed the most.

A Citibank research paper said of the recent policy rate cut: "Similar to past rate cuts, the rationale behind easing is largely to support growth. While the post-war environment is clearly conducive to a growth recovery, an uptrend in GDP is unlikely to kick in until 2010.

"The reduction in rates is supported by (1) anaemic trends in industrial production (averaging just 0.7%YoY during Jan-Aug09 vs. 6.7%YoY last year); (2) benign trends in inflation (up 1.4% in Oct09); (3) A contraction in both reserve money growth and private sector credit growth ( -2.1% and -4.8%YoY currently)." It said.

"The current macro backdrop of benign inflation, sluggish growth, and slowing monetary aggregates does make a case for further easing. While a token cut cannot be ruled out, we expect policy makers to keep rates on hold through 2010, as inflationary pressures mount due to a phase-out of the base effect. We maintain our forecast of GDP recovering to 5.8-6% levels and inflation averaging 6.5% in 2010," Citibank said.

The Central Bank said inflation is expected to rise in 2010 but remain relatively subdued.‘Invest in Sri Lanka: the time is now’

SEC to host an investor forum in Singapore

The Securities and Exchange Commission of Sri Lanka (SEC) and the High Commission of Sri Lanka in Singapore have organized a road show targeting overseas Fund Managers based in Singapore to promote investments into the capital market of Sri Lanka.

With the end of the war and the return of investor confidence, Sri Lanka is poised to enter an era of economic growth and prosperity. In the light of these favourable developments this Investor forum marks the first step in a series of events targeted at promoting capital market investments.

The investor forum has generated an overwhelming response from fund managers based in Singapore "We were targeting around 100 but have already over 125 confirmed participants which demonstrates the renewed interest in the capital market of the country" said Udayasri Kariyawasam, Chairman of the SEC.

A luncheon meeting will be held on Thursday 26th of November at the Fullerton Hotel Singapore followed by presentations from John Keells Holdings PLC, Commercial Bank of Ceylon PLC and National Development Bank PLC.

The Sri Lankan delegation will include Dr. Sarath Amunugama, Minister Public Administration and Home Affairs and Deputy Minister of Finance and Planning, Governor, Central Bank of Sri Lanka, Chairman and Director General of the SEC, Chief Executive Officers of the Colombo Stock Exchange (CSE), members of the stock broking community and representatives of custodian banks.

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