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Public debt again to be a monetary policy instrument. Fiscal autonomy lost? How ethical is it?

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  Article's background The purpose of this article is to reveal a questionable provision of the brand new Public Debt Management Act certified on 18th June, 2024, i.e., section 14 that provides for public debt to serve as a monetary policy instrument for the autonomous Central Bank (CB). This is a strange provision in view of the brand new Central Bank of Sri Lanka Act certified on 14th September, 2023, which gave the full autonomy (operational and financial) to the CB. The autonomy is such that the CB is prohibited from even lending to the government directly or indirectly or to bailout (lender of last resort) banks in liquidity crises. Section 14 The section 14 is reproduced below. Highlights of the section 14 Government debt securities to be issued at the request of the CB to support the monetary policy objectives in terms of the CB Act. Proceeds of such securities to be deposited in a segregated account at the CB. The cost to be fully reimbursed by the CB. Outstanding amount to
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Central bank monetary system failed: Diagnosis and prescription. Treatment is urgent and difficult.

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  Article's background  The purpose of this article is is to reveal how the failure of the monetary concept that has been pursued for the past 73 years has caused the bankruptcy of Sri Lankan economy in 2022. Economic or business bankruptcy is essentially a monetary phenomenon. The background of this view is as follows. Central banks world-wide rest on the concept of old quantity theory to carry out their money printing operations despite the long rhetoric of underlying stories. This theory simply predicts that if the growth of money supply or stock runs faster than the growth of output (or real GDP), the economy will confront an inflation equal to the difference between money supply growth and output growth. For example, if money supply grows annually by 15% while output grows by 7%, inflation will be 8%. This is the famous monetary belief that inflation is always a result of too much quantity of money chasing after too little quantity of goods. This states that inflation is alway
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Sri Lanka facing a deflation trap! Monetary policy failed? What is the solution?

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  Article's background The purpose of this article is;  to prove through the monetary theory  how the super tight monetary policy pursued from April 2022 has caused the present deflationary condition of the Sri Lankan economy and  to recommend an urgent need of at least 300 bps policy interest rate cut to pre-empt deflation risk.  The relevant background is as follows. In the last monetary policy press release on 27 September, the Central Bank (CB) reported a deflationary path in the near-term without taking any monetary policy action to arrest it in advance. The CB stated that deflation path was due to the downward revision of administered prices. Therefore, it appears that the CB currently does not believe the CPI based inflation statistics for the conduct of inflation targeting monetary policy although its inflation target of 3%-7% is set on quarterly average CPI inflation basis. In the monetary policy theory, inflation is always everywhere a monetary phenomenon, that is, the ex
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Central bank interest rate - A magic or a natural science or a geo-political bureaucracy?

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  Article's Background The purpose of this article is to highlight the irrationality and inappropriateness of the Monetary Policy Board (MPB)'s last policy rates decision to keep them unchanged at 8.25%-9.25% as announced on 27 September. The Central Bank (CB) announced the monetary policy decision at 7.30 morning of 27 September.  (press here to read the statement) . The prior MPB decision was 25 bps cut announced on 24 July.  I predicted on 25 September that either MPB would cut policy rates between 25-100 bps or else keep them unchanged at current level of 8.25%-9.25% as policy rate/monetary policy decision is a highly arbitrary bureaucratic decision. (press here to read my article) . Key consideration of the MPB for making the decision Some of those considerations are reproduced below as appeared in the CB press release.  The Board arrived at this decision after carefully considering the recent and expected macroeconomic developments and possible risks and uncertainties on
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T bill yields unduly pressurized? A 25-50 bps or 75 -100 bps policy rate cut on Friday to ease yields and reduce cost to public?

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  Article's background The next policy interest rate decision of the  Monetary Policy Board (MPB)  is due on this Friday at 7.30 morning. It is a general fact that the MPB looks at the quarterly average inflation number based on Colombo Consumer Price Index (CPI) with a target of 3%-7% and changes the Central Bank policy interest rates (SDFR and SLFR) in order to keep the inflation in the target range. Accordingly, from May 2023, policy interest rates have followed a steady cutting cycle with inflation falling closer to zero below the lower bound target (see the Chart below). Quarterly average inflation has been continuously below 3% from April this year whereas it has been below 7% from September 2023.  However, policy rate cuts have been sluggish and rates now remain at 8.25%-9.25% as compared to 15.5%-16.5% level in May 2023. In this background, it is highly likely that the MPB may cut policy rates by 25-50 bps on Friday in view of supporting the economic growth and employment w
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