​Central Bank pushes back against widespread calls for lower rates 

• Defends its tight monetary policy measures, stresses it is necessary
• Says premature lowering rates could prolong pain on businesses and households as runaway inflation could be entrenched 
• Meaningful reduction in inflation possible 18 to 24 months from now

Pushing back on growing calls by many to cut rates to ease the pain on households and businesses and thereby kick start growth in the economy, the Central Bank last week defended its tight monetary policy as necessary until it sees a meaningful deceleration in the inflation which has spiraled out of control this year. 

As business conditions have become more difficult and people’s lifestyles gotten more challenging due to tight monetary conditions prevailing since early this year, the officials in both the Central Bank and the government are hearing more calls of late to lower interest rates as a means to ease these economic hardships.  

However, Central Bank officials last week warned against prematurely cutting rates to support businesses and consumers as doing so would undo even the very little progress the economy has made thus far resulting in more pain by way of price pressures becoming stickier at the current exponentially higher levels. 

As a result, the officials warned that doing business could become more difficult than it is today and consumers would have to endure more cost of living pain for a prolonged period if they lift their foot off the monetary brakes early, before defeating the monster inflation which has gripped everyone at present. 

The Central Bank last week said they believe the inflation might have peaked in September when the Colombo consumer prices came in at 69.8 percent from a year ago, potentially setting off a disinflation path hereafter. 
But, a meaningful reduction in inflation to their desired range of 4 to 6 percent which could somewhat safeguard people’s real incomes and ensure a reasonable level of economic well being appears to be at least 18 to 24 months away from now. 

“We have some tradeoffs in making monetary policy. There is a perception in the market that a reduction in interest rates at this juncture helps businesses and households,” said Dr. P.K.G. Harischandra, Director of Economic Research at the Central Bank.

“The Monetary Board believes that to decrease the prevailing high inflation, tight monetary conditions in terms of high-interest rates are essential at this juncture. Lowering interest rates now could delay the disinflation process which would require a larger and more painful upward adjustment in interest rates once again”, he added reading out the text in the presentation made at the press conference held after the monetary policy announcement last week.     

No sooner current Governor Dr. Nandalal Weerasinghe took over, the Central Bank delivered a bumper 700 basis point hike in interest rates, followed by another 100 basis points hike in July after the economy started firing inflation at unprecedentedly high levels since the rupee was floated in March after exhausting all reserves. 
The Central Banks around the world, including Sri Lanka’s with the exception of China and Japan, are working with a singular focus on reining in inflation at all costs as they are currently on a synchronised path to raise rates led by the United States Federal Reserve which is battling a nearly forty-year high inflation. 

The global economies are combating extreme levels of inflation since the latter part of last year due to the unprecedented level of monetary and fiscal stimulus unleashed during the two years of the pandemic that started unraveling by way of causing too much demand for goods while the supplies and supply chains were disrupted due to pandemic-related restrictions. 

These conditions got exacerbated by the Russia - Ukraine crisis in February which sent global energy and food prices soaring before showing some signs of easing in recent months on concerns of weaker global growth and potential recessions in certain parts of the world in response to the Central Banks’ resolve to raise rates.
Higher rates are capable of bringing down the demand to or near levels of available supplies through what is called as demand destruction, cooling the red-hot prices, and helping the Central Banks to restore price stability which is their number one mandate. 

Price stability allows the Central Banks the space to bring interest rates down once again.