Economy Forward

  Article's Background The Monetary Policy Board (MPB) of the Central Bank (CB) at its meeting held on 24 July at 7.00 am as announced decided to reduce policy rates by 25 basis points to 8.25% (standing deposit facility rate-SDFR) and 9.25% (standing lending facility rate-SLFR) ( Read the MPB policy statement here) . I predicted on 21 July that the MPB would cut policy rates at least by 100 bps in consideration of the present set of data flow relating to the stabilization of the economy with inflation being close to zero and support the government for the pending Presidential Election. Such a rate cut is a valuable item of information for the government to justify the stability of the stabilization. I also predicted that the MPB could even keep policy rates unchanged and provide a policy story to support its (read the article here). However, the MPB cut rates by 25 bps and provided a just story unrelated to inflation path or the price stability. Therefore, this article is to revea

  Article's Background This article predicts that the Monetary Policy Board at the next meeting due on 24 July at 7.00 a.m.  will cut the policy interest rates at least by 100 basis points in view of the present macroeconomic outlook and political stability pending the Presidential Election in October. Policy rate decision by central banks cross the globe is a highly arbitrary bureaucratic exercise. It is based on qualitative judgement on the outlook of the consumer inflation and possible deviations from the inflation targets of central banks. However, central banks can provide diverse macroeconomic stories to support what ever the policy decision as they wish as nothing is experimental or empirical or past perormance is legally assessed. The Federal Reserve Chairman Jerome Powell stated at the latest testimony before the Senate Banking Committee held on 09 July 2024 that the Fed would not need to wait for inflation to reach exactly at the target (2%) to commence the rate cutting c

  Article's Background The Central Bank (CB) Act states that the primary objective of the CB is the domestic price stability. However, the CB media states that it conducts the monetary policy to control inflation at a target of 5% over the unspecified medium. Inflation is the annual rate of increase in the Colombo Consumer Price Index (CPI) published monthly by the Census and Statistics Department. The policy strategy is the policy rates-based money printing. Policy rates are the overnight standing deposit facility rate (SDFR) and overnight standing lending facility rate (SLFR). Its aim is to keep the  overnight inter-bank interest rates within the policy rates corridor.  The policy story is the confidence in overnight inter-bank interest rates to  transmit the policy to country's monetary conditions and aggregate demand suitably that would move inflation towards the target of 5%. However, inflation dynamics and underlying market forces are too complex to be so linked to inter-