Economy Forward

  In his address to the World Economic Forum held on 17 January 2022, the Chinese President stated that “The global low inflation has notably changed, and the risks of inflation driven by multiple factors are surpassing. If major economies slam on the brakes or takes U-turn in their monetary policies, there would be serious negative spillovers. They would present challenges to global economic and financial stability, and developing countries would bear the brunt of it.” This is an alert on impending monetary tightening widely spoken world over led by financial markets and central banks in developed countries in response to fast rising inflationary pressures since third quarter 2021. Such inflationary pressures have caused rise in market interest rates pushing central banks with no option but to lean with the markets by raising policy rates and tapering asset purchases. Impending Global Monetary Tightening The Bank of England has already started by raising the Bank Rate by 0.25% w

  The objective of this short article is to highlight monetary policy operations carried out by the Central Bank of Sri Lanka in the year 2021. However, no comments are made on their suitability or macroeconomic outcome or policy objectives. Present Sri Lankan Monetary Policy Model As in many central banks in developing countries, Sri Lankan monetary policy is operated through two key policy instruments. They are policy interest rates based open market operations (OMO) and statutory reserve ratio (SRR). Both instruments are used to regulate the liquidity in the inter-bank market to prevail in line with policy targets set by the Monetary Board. Policy Rates Policy rates are the two interest rates of the Central Bank used to carry on financial transactions in domestic currency on daily basis with commercial banks and primary dealers in government securities (OMO participants). The Central Bank accepts overnight deposits from them at the standing deposit facility rate (SDFR) whereas it le