The CB's monetary policy decision today? A rate hike or a temporary pause?

This purpose of this article is to predict that the CB will keep policy rates unchanged at current levels of 15.5% and 16.5% at today's Monetary Board meeting.

What should the CB really do?

In terms of the policy rates-based monetary policy model pursued solely for reducing inflation to the target of 4%-5% by contracting the economy at any cost, the CB should raise policy rates at least by another 100 bps. Key factors in this regard are as follows.

  • Central banks in advanced market economies raised rates in the third week of March on gloomy concerns over broad-based inflationary pressures, despite accelerated path of rate hikes in 2022.

  • Inflation in Sri Lanka also seems to be sticky around 50% despite the rapid hike of polcy rates so far by 1,100 bps so far since the begining of 2022. The decline in inflation March was only 0.30%, i.e., from 50.6% to 50.3%. For the first quarter 2023, it is marginal from 51.7% to 50.3%, despite the new CPI. 

  • Therefore, there is no sign of being able to get the inflation down to a single digit by the end of 2023 as the CB predicts.

What will the CB actually do?

However, unless the IMF forces to raise the policy rates as part of remaining 150 bps of the IMF recommendation, the CB will keep policy rates unchanged by stating the following reasons.

  • Disinflation is continuously taking place in response to prudent fiscal and monetary policies pursued so far.

  • Remittances have doubled in February where the overall BOP balance has reported a surplus first time after February 2020 with gross official reserve surpassing 2 bn USD first time after February 2022.

  • Rupee is appreciating and its favourable effects to lower inflation through reduced cost of imports are expected in the period ahead.

  • The economy shows strong signs of stabilization over time consequent to prudent fiscal and monetary policies, confidence boosted by the IMF programme, external funding expected and debt restructuring in progress.

  • The transmission of the monetary tightening and other policies implemented so far needs further time to impact favourably on inflation as envisaged. The favourable impact of the policy rate increase of 100 bps effected on 3 March on inflation also is also being awaited. 

  • Market interest rates led by Treasury bill yields also are seen stabilizing at favourable moderate levels as expected.

  • The cautious approach now being pursued by banks through tightening of lending standards also is expected to bring down inflation faster than envisaged where further tightening of the monetary policy may not be required at initially expected strength.

  • Therefore, disinflation is envisaged to move on a firmer path towards a single digit inflation rate by end of the year.

Concluding Remarks

  • Policy rate decision is a highly arbitrary decision with reasoning for a rate hike or cut or unchanged as the CB wishes. Nobody can prove or contradict the decision in monetary theory or statistics with certainty.

  • What ever the decision is, it will not have any effect on the prevailing level of hyper-inflation suffering the country around 50% being close to inflation of 50.5% in Turkey that has been suffering a currency crisis mostly since 2018 beause prices are the outcomes of markets that cannot be simply controlled by policy interest rates.

  • However, some money dealers who have insider information will make some money out of artificial speculative activity.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles publish. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)


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