First Capital Research trims down its rate cut probability to 50%

Considering the recent major policy changes, First Capital Research has trimmed down its rate cut probability to 50 percent from the previous expectation of 100 percent probability, specifically due to the tax benefits, moratorium on loans and easing of capital adequacy to stimulate the consumer demand and revive growth in the economy.

"Foreign outflow is not considered a major concern considering the lower level of foreign holding in the Gov. Sec market," the research arm said in its pre-policy analysis.

"However, we are of the view that 50% probability exists for a "No Change" in Monetary Policy as well due to the major benefits. We continue to maintain that SRR is likely to be maintained at the current level."

On 27th Nov 2019, Government announced hefty tax reliefs with the expectation of increasing the consumer spending while boosting the economic growth of the country.

We expect measures such as reduction of VAT to 8% (from 15%), removal of NBT and revisions to PAYE tax to increase disposable income of consumers, thereby boosting consumer spending in the economy. However, government’s ability to bridge the revenue loss due to the recent tax revisions will be a concern leading to a risk in 2020. The stimulus package may potentially lead to fiscal slippage, reducing the possibility of further monetary easing in the near term.

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