First Capital expects Average Weighted Prime Lending Rates (AWPLR) to rise in the second half (H2) of 2024 between 11-13% with the demand for credit and pick up in inflation and economic activities after continuing the current downward trend till June.
Accordingly, First Capital said that the downtrend in AWPLR will continue and reach a low of 10.0-12.0% during the first half (H1) of 2024, however, with the stronger demand for credit and the pick in the economy with the gradual rise in the Small and Medium Enterprise segment and inflation, slight pressure on interest rates will push AWPLR to 11.0-13.0% during H2 in 2024.
“The steep fall in the AWPLR has been beyond our expectations and ahead of the dip in bond yields primarily due to the lack of credit in the system,” it said, adding that private credit may slow in the first half of 2024 and rise in the second half.
End of last week the AWPLR saw a rise for the first time after weeks of continuous downward trend as it gained by 45 bps to 12.25%, most of the banks are lending SME and microfinance loans at a rate of about 2-3% above the AWPLR.
Moreover, First Capital said that the Central Bank of Sri Lanka (CBSL) will to take a pause and maintain rates in the near future, paving way for market rates to adjust downward in-line with the decline in risk premia attached to Government yields, with positive strides made on external debt restructuring while going in line with IMF guidelines in order to secure the subsequent tranches.
Also, it said that the Central Bank will implement the proposed single policy rate in the first quarter (Q1) of 2024 via a rate cut to the Standard Lending Facility reducing it to 9.0% to be in line with the Standard Deposit Facility while raising the Statutory Reserve Ratio to 4% in the second quarter of the year.
“With the completion of external debt restructuring during H1 2024, 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 the end of H1 2024 to reach 10.0%-12.5%,” First Capital stated in its forecast.