- Market anticipates 25 bp rate cut could push yields lower in near-term
Market sources expect yields on Government securities to fall in the near term based on the expectation of a possible 25 basis point policy rate cut at the next Monetary Policy Review.
Speaking to The Sunday Morning Business, First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew stated that they expected yields of Government securities to decline in the near term, particularly if the anticipated 25-basis-point policy rate cut materialised at the next Monetary Policy Review.
However, he expects the yields to rebound to current levels after this decline.
Commenting on their target for Government securities for the next 12 months, he stated: “We expect the one-year yields to be 7.5-8.5% for the next 12 months, along with 9.5-10.5% for the five-year yields and 10-11% for the 10-year yields.”
He further revealed that downward pressure on yields was expected to be supported by improved liquidity in the system, particularly as they anticipated an economic slowdown due to reduced Government spending.
However, speaking to CNBC on Wednesday (13), Central Bank of Sri Lanka (CBSL) Governor Nandalal Weerasinghe stated that they were of the opinion that the current policy rates were appropriate based on the information available.
He said: “We had some concern earlier because of the uncertainty of the US tariffs and our access to global markets and impact on the external sector. If there is going to be an impact on growth and inflation, then obviously we have a good space in the monetary policy.
“For example, our inflation target is 5% and the policy rate is 7.75%. So there is a positive 2.75% real interest rate buffer.”
Accordingly, Weerasinghe stated that he did not foresee any risk of the economy slowing down due to US tariffs, nor a risk of inflation exceeding the 5% target over the next 18-20 months. He added that even if circumstances were to change, Sri Lanka had sufficient monetary policy buffers to mitigate the impact of such negative developments.
The CBSL Governor stated that he believed the current deflationary environment was only temporary and that Sri Lanka could overcome it, reaching its 5% inflation target by the first half of 2026 or within nine months.