Central Bank takes sharp move to tighten policy | Daily News

Central Bank takes sharp move to tighten policy

Governor opines previous stance risky and seeks debt restructuring alongside IMF support

The Monetary Board under the purview of new Central Bank Governor Dr. Nandalal Weerasinghe took drastic action to tighten monetary policy. The 700-basis point move to both the Standing Deposit Facility Rate and the Standing Lending Facility Rate took them to 13.50% and 14.50% respectively.

The move comes as the Central Bank has formally advertised seeking a Legal and Financial consultant to restructure the debt obligations of the country. The country will seek assistance from the IMF with discussions currently underway and technical representations to be made alongside the IMF World Bank Spring meetings. Dr. Weerasinghe made these representations at the Press Conference following the Monetary Policy Announcement on April 8 at the Central Bank.

The governor noted that the previous strategy of keeping an appreciated exchange rate alongside negative real interest rates perverted the financial system. Dr. Weerasinghe deeply criticized the large opportunities it created for arbitrage in the economy. Dr. Weerasinghe noted that floating the exchange rate may cause prices to increase but at the very least there would be the availability of goods in the marketplace. Noting the lag impact of Monetary Policy Dr. Weerasinghe suggested that things would get worse before they began to get better. He noted that inflation would remain high in the coming months.

Dr. Weerasinghe noted that a low taxation framework alongside loose monetary policy actions by the Central Bank helped transfer large amounts of wealth from pension savings to the corporate sector.

He noted that the negative real rates witnessed in the country previously were mirrored in the rising profitability of the corporate sector evidenced by his research of non-financial entities listed on the Colombo Stock Exchange.

The Governor called on the public to help build political and social stability as the necessary reforms are undertaken to put the economy back on the right track. The Governor noted that the Monetary Board would revert to a ‘Flexible Inflation Targeting’ mechanism from the ‘Modern Monetary Theory’ based framework it had switched to in recent times. The move to increase rates comes alongside primary auctions for government securities being locked in at much higher rates. The 91-day treasury bill yield has risen 551 basis points from the End of February to the most recent auction on 8 April. Dr. Weerasinghe noted that under his tenure there would be much more successful debt issuances by the government.

Dr. Weerasinghe said that recently the Central Bank had been taking dollar liquidity from the banking system and that this was part of the reason that the banking system lacked the dollars to support normal commercial operations. He said there would be restructuring taking place at the Central Bank and noted that under his administration there would be more transparency in the operations of the Central Bank with little outside interference as provided for under the law. Dr. Weerasinghe dismissed tabloid stories that fake currency had come into circulation. He noted that all money in Sri Lanka and other regions was printed by a joint venture with De La Rue. 

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