Thu, 22 Feb 2024 Today's Paper

​Central Bank pushes back against widespread calls for lower rates 

10 October 2022 03:00 am - 12     - {{hitsCtrl.values.hits}}

A A A

  • 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. 
 

 


Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

  Comments - 12

Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka
  • Christian old lady Monday, 10 October 2022 10:17 AM

    I am depending on my bank interest to survive... please increase the rates so that we retired old ladies can live. We have to pay rent / buy medicine / buy food and clothes and pay for electricity and water ... please help us old folk at home ...

    Food first religious place last Monday, 10 October 2022 12:27 PM

    The religious persons are the greatest cause of problems in our nation. Also asking for things, which cause far greater number of others problems. Like this increase rates more request. Inflation will kill the value of any holding far more than the increase from the interest rates anyway.

    Arnold Monday, 10 October 2022 10:40 AM

    Stupidest move at this point of time. This leads to economic contraction and drainage of money out of country. I know several SME industrialists who have closed up, deposited their capital in high yielding FDs and have moved to foreign countries!!

    Mokada methana hore Monday, 10 October 2022 10:43 AM

    Usual Central Bank garbage. They won't even go to fully flexible exchange rate to allow all the held up dollars to come through for true value rates... The Central Bank top officials and greedy staff just want their easy pensions, after getting their terms and throw around their bull talk financial wizard terms to keeps the ordinary public deceived.

    Fathima Lai Monday, 10 October 2022 10:53 AM

    Doesn't the CB governor understand that people or companies need to earn more to pay more on tariffs? Businesses have already doubled or more their pricing. What about salaried people? It will be worst if people start to engage in illegal activities to earn to cover these costs.

    BUSHEL Monday, 10 October 2022 12:43 PM

    It is politicians who messed up economy Do not blame governor taking measures for stopping further downfall of living conditions . No governor can do better.

    Kamu Seeni Monday, 10 October 2022 02:39 PM

    They definitively can. They can choose to release the peg, and obvious thing even IMF sees as must for the long term.

    Weda Mahathaya Monday, 10 October 2022 12:44 PM

    The money printing is now the greatest driver of inflation. The Central Bank is not mentioning, as they are the culprit supporing for the government for it.

    sam Monday, 10 October 2022 12:54 PM

    We retired depend on interest. Please increase rates

    Reply to Arnold Monday, 10 October 2022 01:11 PM

    What is you solution lower spending reduces inflation Higher spending increases inflation We got to reduce inflation to manageable levels

    Senior Citizen Monday, 10 October 2022 01:18 PM

    I can hardly manage with the high cost of rent / food / medicine / utility bills and now they want to reduce rates ... how does a Senior Citizen manage ?

    Kadu Karaya Monday, 10 October 2022 04:29 PM

    Sorry to hear, but unless you demand for some pension for old persons to be done, those without assets, you'll have to rely on donation from those who care for you. Some democratic Western country have means tested age pension for the poor. So, those with limited assets of land and money... They even track five years of all financial track of person making the request to make sure the requestor hasn't donated in the last few years to get below the threshold to receive age pension. Most persons of western country working have their EPF/ETF pension funds, so will never get below threshold until the use up all their assets (selling house, land, vehicle) to meeting the costs of day to day living. Because of the possibility of fraud (by the elderly for the free money) checks are thorough and continuous! Sri Lankan old people want to keep their cake and eat it too


Add comment

Comments will be edited (grammar, spelling and slang) and authorized at the discretion of Daily Mirror online. The website also has the right not to publish selected comments.

Reply To:

Name - Reply Comment





Order Gifts and Flowers to Sri Lanka. See Kapruka's top selling online shopping categories such as Toys, Grocery, Kids Toys, Birthday Cakes, Fruits, Chocolates, Clothing and Electronics. Also see Kapruka's unique online services such as Money Remittence,Astrology, Courier/Delivery, Medicine Delivery and over 700 top brands. Also get products from Amazon & Ebay via Kapruka Gloabal Shop into Sri Lanka

Human lives at stake… When protectors of the law become predators

On Thursday (January 18), a sub-inspector attached to the Narammala Police St

Research on sex work during Lankan civil war: Sex workers and their faint cries to access basic rights

A broken pair of rubber slippers kept on a display caught this writer’s eye

Newlywed Sri Lankans forced to remain childless

The ongoing economic crisis in the country is not only impacting the availabi

Paramedics and docs in tug of war over raise in DAT allowance

On Tuesday (January 9), staffers in the paramedic services launched an unanno