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Monday, January 30, 2023

Policy rates should have been increased further: Economists – The Morning

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Sri Lanka’s policy rates, which the Central Bank of Sri Lanka decided to maintain at current levels during the Monetary Board meeting on Thursday (19), should have ideally been increased further, economists opine. 

Advocata Institute Chief Operating Officer Dhananath Fernando stated that he expected the policy rates to be increased during this Monetary Board review by at least another 50 basis points. However the Central Bank had decided to maintain the rates this time. 

“Interest rate bids submitted for Sri Lanka’s Treasury bond auctions last week were higher and I thought the Central Bank might increase the policy rates. Maybe it arrived at this decision pending a minister’s appointment for the Finance portfolio,” he told The Sunday Morning Business. 

On Thursday, the Central Bank’s Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at the current levels of 13.50% and 14.50%, respectively.

The Board is of the view that although inflation is projected to remain elevated in the near term, the substantial policy measures taken by the Board at its meeting held on 8 April 2022, combined with the other measures to stem the firming up of aggregated demand pressures, are expected to contain any further build-up of inflation expectations and ease inflationary pressures in the period ahead.

Meanwhile, independent economist and Advocata Institute Associate Rehana Thowfeek stated that she believed policy rates should have been increased further this time as well. 

“Policy rates should have been increased to curb inflationary pressures, which are still at high levels. But they have said the other measures they have taken are hopefully going to assist in curbing inflationary pressure even without a rate hike,” Thowfeek added. 

The Central Bank noted that market interest rates had notably adjusted upwards, reflecting the significant monetary policy tightening measures taken by the Central Bank in April 2022. The interest rates on deposit and lending products of financial institutions have adjusted upwards considerably, correcting some anomalies that prevailed in the market interest rate structure, according to the Central Bank.

“Although domestic credit in rupee terms recorded a significant expansion in March 2022, mainly due to the valuation impact of foreign currency-denominated loans, the parity-adjusted domestic credit expansion is estimated to have slowed. Meanwhile, the resultant expansion of broad money growth has been weighed down by the contraction in net foreign assets of the banking system. It is envisaged that the elevated interest rate structure would attract more deposits into the banking system,” the Central Bank added. 

However, the expansion of domestic credit, particularly to the private sector, is expected to remain restrained due to the passage of significantly tight monetary policy measures, according to the Central Bank. 

Meanwhile, yields on Government securities, which increased considerably in the recent past, are expected to moderate and stabilise at lower levels in the period ahead with the necessary fiscal adjustments together with renewed efforts to restore political stability in the country.


– By Tanya Shan


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