Interest rates

Real interest rates will remain moderate for some time

  • Nation Lanka Equities says stock market reaction to rate hike seems too premature

National Lanka Equities expects real rates to remain subdued for some time and believes the stock market’s reaction to a rate hike is too premature.

In a research note, Nation Lanka Equities said the stock market remained on a weaker basis, citing a possible hike in key rates.

“Despite the decision, the average weighted fixed deposit rate (AWFDR) saw little increase and remained at 5.6% due to excess liquidity in the banking sector,” NLE said.

“It also saw the country go into low or negative real yields due to inflation hovering around 5%.”

He believes that even in one event, the AWFDR increases an additional 100 basis points to 6.5-7%, real interest rates will remain subdued with inflationary pressures likely increasing by more than 7%, especially after the upward adjustments in commodity prices.

“We believe that to see some lag in equity markets, real interest rates should at least generate a minimum yield of 5% which in turn should see a more than 600 basis point rise in deposit rates. , which is highly unlikely in the short term, ”he added.

“Therefore, to immediately move away from the stock markets, which have generated more than 40% return since the start of the year, is therefore considered unwarranted.”