Economy Forward

  Article's Background From the beginning of this year, markets have been speculating on the commencement of the Fed's rate cut cycle to ease its monetary policy. The basis is the inflation reaching around 2% target from its peak of 7.1% reported in June 2022. However, the Fed consistently communicated that it had not gained the full confidence on inflation sustainably falling to the 2% target to think of a policy reversal. However, the Fed Chairman at the Jackson Hole Symposium held on last 23 August clearly signaled that the time has now come to dial back the policy (Read the speech here) . The next monetary policy meeting is due on September 17-18. Markets speculate at least 50 bps rate cut at the next meeting and 100 bps rate cut by end of this years. Bank of England and European Central Bank have already started rate cutting cycle with initial 25 bps cut followed by Bank of Canada. Therefore, the purpose of this article is to highlight the nature of the Fed's rate cutt...

  Article's Background Except central banks in Japan and China, almost all central banks tightened monetary policies since early 2022 by hiking interest rates competitively as usual. The reason was to control four-decades-high inflationary pressures that erupted from the mid-2021.  The cause of inflation was the reponing of economies from the Corona pandemic with severely contracted supply side due to disruption in global supply chain and capacity shrined by the pandemic. However, central banks read this as being driven by the excess demand created by the lavish printing of money they did at interest rates close to zero during the pandemic.  Such loose monetary policies were justified as policy measures taken to forestall any financial instability that could arise from the high demand for reserves and spending  during the pandemic . Although central banks at the beginning of inflationary pressures  attempted   to label it as transitory, they suddenly starte...

  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 cutt...

  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 linke...