Thursday Dec 12, 2024
Thursday Dec 12, 2024
Friday, 25 November 2022 00:30 - - {{hitsCtrl.values.hits}}
The Monetary Board of the Central Bank of Sri Lanka yesterday announced an unchanged stance on policy rates, to contain any demand-driven inflationary pressures in the economy after assessing the current and expected macroeconomic developments.
Policy rates were last revised in July by 100 basis points – Standing Deposit Facility Rate to 14.50% and Standing Lending Facility Rate to 15.50% whilst in April the tightest action came with a 700 basis points increase doubling the rates.
The Board was of the view that the prevailing tight monetary policy stance is necessary to restrain any underlying demand pressures in the economy.
“We have been tightening the Monetary Policy since last year’s August and it was further tightened in April and July. Many interpret that the Central Bank policy stance shrank the economy significantly but what we did was rescue an over-expanded economy from being burst.
“Our economy was similar to an overinflated balloon which was about to burst and through the measures we introduced, we mitigated it from rupture. As a result, we have been able to bring down the inflation and secure our medicine, fuel and other essential food items,” Central Bank Governor Dr. Nandalal Weerasinghe told journalists yesterday.
Noting that the political instability was seen repeatedly, the Governor noted that the Central Bank did not let the same happen to the economy and that they now expect to move forward with a stable economy for revival and growth.
As per the Central Bank, the real economy is expected to contract in 2022, impacted by the stability-oriented policy measures that led to tightened monetary and fiscal conditions, along with supply-side constraints and prevailing uncertainties, among others.
Nevertheless, economic activity is expected to make a gradual, yet sustainable recovery, supported by envisaged improvements in supply conditions, improved market confidence, and the impact of corrective policy measures being implemented to stabilise the economic conditions.
The Board also noted with concern the anomalous rise in market interest rates, particularly deposit interest rates and short-term lending interest rates, despite the recent improvements in overall money market conditions and the adverse implications on business and economic activity. The Central Bank would expect a moderation of excessive market interest rates, in line with the prevailing policy interest rates.
“If an appropriate downward adjustment in the market interest rates would not take place in line with the envisaged disinflation path, the Central Bank will be compelled to impose administrative measures to prevent any undue movements in market interest rates,” the statement added.
It also noted that going forward the anomaly in market interest rates is expected to be rectified, benefiting mainly from the notable reduction in the overall money market liquidity deficit and the anchoring of inflation expectations in line with the envisaged disinflation path.
Further, the high-risk premia attached to the yields on Government securities are expected to shrink in the period ahead as the debt restructuring process progresses and fiscal sector performance improves with the consolidation measures in place.
The Board reiterated its continued commitment to restoring price stability and ensuring financial system stability and remains confident that inflation would follow the projected disinflation path underpinned by the prevailing monetary policy stance while supporting the economy to reach its potential over the medium-term.
“The Board remains ready to react appropriately to any materialisation of risks to the forecast,” it added.
