CB assures policy stability should excesses emerge
„Rules out any near term pressures, albeit food prices continue to soar
In what could be an attempt to `anchor expectations about possible overheating of the economy and emergence of other imbalances such as potential asset bubbles which could arise from unprecedented level of monetary stimulus, the Central Bank said they remain, “vigilant and watchful,” of such developments to ensure policy stability as the economy is making headway with added vigour.
“The Central Bank resorts to be vigilant about maintaining conditions of relative monetary stability”, said Central Bank Governor, Prof. W.D. Lakshman.
“Demand side pressures could emerge as economy begins to record above trend growth, supported by the extraordinary levels of (monetary) policy accommodation. Hence the need to be watchful”, he added.
While the Central Bank is watchful of the food inflation, which rose by nearly 10 percent in March from a year ago, the officials confided that upcoming supplies would soften the food inflation in the months to come.
The economy is still operating at significant slack as a result of five years of slow growth and lost output last year, and thus the Central Bank rules out any near term demand side pressures as the economy is currently making up for that lost output.
Brushing aside concerns of rising secondary market bond yield as any indicator of the market interest rates, Prof. Lakshman reaffirmed the Central Bank’s commitment to maintain the single digit interest rates structure in the period ahead, providing much needed clarity and predicability to the market.
Sri Lanka has a tainted history of going through often changing interest rates cycles which are known as ‘boom-and-bust cycles’, through early 2019, but the economy appears to be getting slowly acclimatized to a sustained low interest rates structure since
January last year, which received a tremendous support from the pandemic induced deeper monetary policy easing.
Sri Lanka is currently in its third year of monetary policy easing, the longest such stretch in its entire history as the Monetary Boards in the past have had to retreat no sooner they apply gas as imports surge and the rupee goes bust, forcing a complete reversal of policies.
There is a section of economic analysts who constantly raise concerns about a looming overheating of the economy as a result of record high Central Bank liquidity. But Prof. Lakshman said unprecedented level of an economic shock should be met with similar unprecedented policy response.
He showed that such policies in fact had yielded results by way of a faster revival in businesses and a resurgent economy, which otherwise would not have been possible.
“We are beginning to see the positive effects of these measures in areas of employment generation, income creation, credit conditions, faster economic revival and faster than expected rebound in high frequency indicators”, Prof. Lakshman said pointing to the robust economic revival staged during the second half of last year which to greater extent blunted the contraction in the first half to result in an overall contraction of 3.6 percent.