Central Bank Governor Dr. Nandlal Veerasinghe – photo by Ruwan Walpola
- Monetary Board hikes policy rates by 7% with immediate effect
- Highest ever hike and strictest monetary policy action is key to macroeconomic stability, says new governor
- Assures future policy stances to be favorable but emphasizes ending political crisis and social unrest to ensure greater stability
- Suggests that fiscal policy also needs to support stability
- Seeks to restore the independence and credibility of CBSE with transparency and honesty
- Says CBSL is accountable and responsible to the people, not a political party
- The veteran central banker says he has the full support of the government. and opposition; Claims will not have political impact during his tenure
by Nistar Qasim
The worsening economic crisis has forced the monetary board to impose a historic monetary tightening with a new central bank governor calling the move crucial to ensuring macroeconomic stability.
The Monetary Board in its meeting chaired by the new Governor Dr. P. Nandlal Veerasinghe decided to increase the Central Bank’s Permanent Deposit Facility Rate (SDFR) and Permanent Credit Facility Rate (SLFR) by 700 basis points from 6.50% to 13.50% and 7.50% to 14.50% respectively with immediate effect.
Dr. Weerasinghe told reporters late in the evening, “This is the highest ever policy rate hike and strictest monetary policy action in the history of the Central Bank of Sri Lanka and this important decision was taken after an honest and realistic assessment by the Monetary Board. Was.” Briefing after the meeting of the Monetary Board.
He described the move of the Monetary Board as “proactive”, meaning that some decisions in recent days were not as they were, hence the ongoing crisis in the country.
In its brief statement, CBSL said that the Monetary Board noted inflationary pressures which are likely to intensify in the period ahead, due to aggregate demand build-up, disruption in domestic supply, exchange rate depreciation and higher commodity prices globally. Driven by prices.
The view was that an adequate policy response is essential to prevent the build-up of additional demand-driven inflationary pressures in the economy and to pre-empt the growth of unfavorable inflationary expectations to provide the necessary stimulus to stabilize the exchange rate. . To remove the anomalies observed in the market interest rate structure.
Dr. Weerasinghe also told reporters that decisive monetary policy action would send a strong message to the markets and investors that the new leadership in CBSL is taking corrective action to ensure macroeconomic stability and confidence. “We expect a positive response from the banking and financial community as well when the markets open on Monday,” he added.
He said the move will help in suppressing excessive demand, curb imports which will reduce pressure on foreign exchange reserves, rule in high inflation in the medium term. However, he cautioned that the due beneficial effect of yesterday’s decision would be felt in only three to six months and interim inflation is projected to rise to over 25% from the current 17.5 per cent due to past policy lapses.
“It is not an easy situation. We cannot turn the crisis that has arisen within two years into two days. Although I am confident that the Central Bank will play its part for a quick turnaround,” said the new governor.
Dr. Weerasinghe also said that strict monetary policy and other planned measures including an external debt restructuring strategy and IMF assistance program along with prudent fiscal policy will help create a conducive environment for greater macroeconomic stability, the ongoing political crisis and social unrest. can do. must end.
“The pace of change (with new CBSL measures and IMF support) and the end of the sufferings of the people depends on political stability and restoration of normalcy,” he said.
The new governor also promised to restore the independence and credibility of CBSE. “An independent central bank is the only way to ensure prudent policies regardless of politics. The current Monetary Law Act provides such freedom. I will not tolerate political interference during my tenure and I have full support of the government, the opposition and the public. received.
“CBSL is not a political party but accountable and responsible to the people. I have to live up to the public’s expectations of ensuring the independence and credibility of CBSL,” said Veerasinghe, who was previously a senior deputy governor and took early retirement after being side-lined in the early part of the Gotabaya Rajapakse administration in October 2020. Took it