The Central Bank of Sri Lanka (CBSL) is likely to cut policy rate by 25bps in the third quarter of 2025 to counter the slow growth in the economy whilst ensuring that inflation returns to the envisaged target of 5%, First Capital said.
In their mid-year outlook, First Capital said that the central bank will go for another rate cut of 25bps in the third quarter to boost the economy which is slowing down due to limited government spending and weak consumer demand.
“We expect CBSL to support accelerated growth with another rate cut of 25bps to boost economic growth, which we believe is slowing down owing to limited government spending and weak consumer growth burdened with prevailing high taxes,” it said.
Moreover, First Capital expects the return of market liquidity back to Rs. 150 billion, coupled with expectations of reserves strengthening to forecasted $ 7 billion by end of 2025.
Despite the expectations of a possible 25bps rate cut during the third quarter, First Capital believes the yield curve to remain within targeted bands within the next 12-month period.
“Possible increase in government capital spending to counter the slowness of the economy, coupled with increased private and state sector credit demand drying down liquidity in the market, and increasing trend of bond maturities in 2026E and 2027E are considered key factors limiting further downward shift on yields and to remain within our stipulated targets,” it said.
Further, it said that the possibility for another 25bps rate cut, gives potential for a further downward shift in its outlook for AWPLR to between 7.5-8.5% for in the second half of 2025, whilst pick up in both private and state sector credit is expected to reduce liquidity in the first half of 2026 pushing AWPLR to our upgraded target of 8-9%.
(The Morning)
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