Economy Forward

  The objective of this article is to highlight how the Sri Lankan monetary policy has lost its purpose by being unable to provide contemporary monetary needs of the economy and sectors towards recovering from the economic crisis.  The highlights are based on the information released by the Central Bank (CB) in its monetary policy press release on 25 January and recent monetary and money market statistics available on the CB website. Five Highlights of Monetary Mismanagement in Brief The policy interest rates-based monetary policy model pursued for inflation targeting has collapsed since 2 January this year, leading to a bureaucratically induced black money market. Therefore, policy decision to keep policy interest rates unchanged at 14.5% and 15.5% serves no purpose. Money market shows a irregular and panic volatility and near-term instability caused by new OMO manipulations. The story of disinflation is only a statistical illusion and a public policy fraud as the public does not

  The objective of this short article is to highlight money market manipulations effected by the new OMO/monetary policy rule announced by the Central Bank of Sri Lanka (CB) on 2 January 2023 (see the OMO circular below), effective from 16 January. Subject Background I analyzed this subject in my two previous articles (7 and 16 January) as follows. The new OMO rule is nothing but monetary rationing connected with policy interest rates (price controls). Therefore, the general experience that price controls and rationing cause market manipulations by both the state authority and market participants is common to the money market too. The CB would manipulate reverse repo (new liquidity injection) auctions to drive the money market to show expected outcomes mainly through its favored dealers.  The key market outcomes as sated in the CB press release on 7 January are to reactivate the call money and repo markets through market funds and to moderate interest rates structure from present sugar

The new Open Market Operations (OMO) system comes into effect today, 16 th January 2023, which is a special bank holiday.  In last two articles released to this blog on this subject, I commented on this new OMO as follows. It invalidates the present policy interest rates corridor and money market-based monetary policy model followed by the Monetary Board and breaches the authority given to the Monetary Board under the Monetary Law Act (MLA) for implementation of the National Monetary Policy. Inter-bank overnight interest rates will move beyond the policy rates corridor depending on market conditions. This provides the space for the Central Bank to favour its friendly dealers on liquidity management through money printing via frequently conducted repo and reverse repo auctions that may be connected with insider monetary dealings. This article is to elaborate further on this subject. It mainly focuses on explicit price controls and rationing on money under the new OMO rule and r