Article’s Purpose
This article is to provide quick comments on the irrelevance of the monetary policy statement released today as part of the Central Bank’s media activisms (Read the policy statement here).
- The Monetary Policy Board (MPB) has announced of keeping its operating policy interest rates unchanged at 7.50% (Standing Deposit Facility Rate) and 8.50% (Standing Lending Facility Rate) despite the persistent deflationary trap confronted by the economy since August 2024 that requires a considerable policy rate cut to arrest the deflationary trap to return to the statutory inflation target of 5% on a quarterly basis.
- The policy statement has become unusually short-cut due to the non-availability of macroeconomic facts supporting such unchanged interest rates despite the deflationary course of 6 consecutive months which the MPB predicts to continue until mid-2025 and settle in the targeted levels (i.e., 5% with a margin of 3%-7% of highly inflated economy) by end of 2025.
- As such, the MPB has a considerable policy space for inflating the economy, given an underlying real interest rate of 2% or 4%. Therefore, the MPB only pursues a domestic inflation stability target in contrast to domestic price stability object stipulated in the law. In that context, the deflationary trap running around 4% at present is indicative of the meaningless model of the monetary policy.
Irrelevant Contents in the Policy Statement
Ten contents are highlighted below with a short response given under each as to why it is irrelevant or unacceptable.
1. The Board remains confident that the prevailing monetary policy stance will ensure that inflation will move towards the target of 5% while supporting the growth of the domestic economy.
This is irrelevant as the MPB or the Central Bank has no duel mandate on price stability and economic growth. Therefore, this statement comes from old writings of the previous central bank’s policy literature on all stability mandates.
2. Inflation remains negative at present mainly due to repeated reductions in electricity tariffs and fuel prices.
First, this violates the monetary policy principle adopted around the world that inflation (or deflation) is always everywhere a monetary phenomenon. Therefore, central banks have no mandates to select prices of commodities in the consumer basket and to decide policy instruments, accordingly. Their mandate is to follow up on movements of overall consumer price index and underlying headline inflation for the monetary policy targets.
Second, this statement itself is evidence for the MPB’s inability to control inflation at targets levels. If electricity and fuel prices can cause a deflation of 4% from an inflation of 2%-5% earlier while the MPB has been watchful, it is the government/fiscal policy that can practically control inflation.
Third, at the last meeting with the COPF at the Parliament, the MPB informed the COPF that the MPB was not responsible for the present deflationary trend as deflation had been caused by supply side or fiscal measures (Read the article here). This shows that the MPB has grossly violated its inflation target mandate as well as domestic price stability mandate.
3. Rupee liquidity remains at surplus level. Market interest rates have continued to decline in line with the eased monetary policy stance.
The surplus liquidity has been created by the MPB. If the liquidity is abundant, market interest rates will decline. However, the policy controversy here is that if there has been an eased monetary policy stance as stated, the economy should not confront such a deflation trap.
4. Supported by low interest rates, credit flows to the private sector remained robust.
This is an arbitrary statement without evidence. Credit flow is a result of banks and customers. Even if interest rates rise, credit tend to expand due to economic activities. As the MPB has no specific credit flow instruments, this statement is irrelevant for the monetary policy.
5. External sector performance has been more favourable than expected.
The MPB has no mandate for the external sector performances or stability. Its only mandate is to assess the factors including those of external sector performance on the inflation and take authorized policy measures independently to comply with the mandatory inflation target. Further, what was expected was not communicated in the earlier policy statement.
6. Increased net foreign purchases by the Central Bank and the receipt of the fourth tranche of the IMF-EFF programme helped increase official reserves enhancing resilience.
This is not a part of the monetary policy but the Central Bank’s normal business operations as a fiscal agent and foreign currency dealer. As the mandate of the official foreign currency reserve is not stipulated in the law, the resilience is highly questionable.
7. Risks to the inflation and growth outlook remain broadly in balance.
This is a meaningless statement copied from the US Federal Reserve. First, the MPB has no mandate for balancing the inflation and growth. It has only the domestic price stability mandate. Second, there are no statistics to establish such a balance.
8. However, the Board is watchful, among other things, of the possible impact of global trade and geopolitical uncertainties on the Sri Lankan economy.
This should be referring to Trump Trade phenomenon. It is a matter for the government and not for the MPB. The mandate of the MPB is to control inflation arising from all factors. However, the current stance of the MPB is that such conditions of inflation are supply side or non-monetary inflation which has no responsibility to the MPB. Further, Sri Lankan economy never experienced global trade and geopolitical certainty.
9. As such, monetary policy formulation will continue to be based on a forward looking and data-dependent approach.
This is not acceptable as the members of the MPB are not divine to have such a macroeconomic foresight. Not only monetary policy but also any policy public or private is data-dependent. However, monetary policy is just past-data dependent which can be interpreted for any policy decision, policy rate cut or increase or unchanged.
10. The Board stands ready to respond to emerging risks to maintaining price stability while supporting the economy to reach its potential.
This is irrelevant as the MPB has no such a duel mandate.
Concluding Remarks
- As such, this policy statement is nothing but a media document attempted to show that the MPB is attending to a rocket science-like macroeconomic management policy beyond the government.
- The MPB has to submit its second non-compliance report on the inflation target to the Parliament next month covering the two quatres of December 2024 and March 2025. This report similar to the last report will be of no use as COPF members will talk about some other operations of the Central Bank such as pyramid schemes and disperse happily.
- In Sri Lanka, as no penalty is imposed on public authorities for non-compliance with their mandatory goals, they can continue with their public seats and remuneration while submitting theoretical policy statements. Unaccountable public service mandates are poor state governance detrimental to the economy and public.
- The MPB may state that inflation will reach the target in due course or in the medium or long-term as inflation expectations are now well-anchored. However, we all will be dead in the long run as Keynes stated and, therefore, public authorities must help living standards when people live.
- Therefore, it is now high time to question whether this is the monetary policy that the crisis-hit economy of Sri Lanka needs for its recovery. Such questioning is not a criminal offence.
- The US new President Donald Trump urged the Federal Reserve to cut interest rates at both meetings held on 27 January and 19 March to help his domestic economic policy. He especially requested to cut interest rates at the last meeting (19 March) to help his tariff policy, given the commencement of falling commodity prices. However, the Federal Reserve kept policy rates unchanged at 4.25%-4.50% citing uncertainties around new government policies, given elevated inflation levels (Read the policy statement). Therefore, President Donald Trump is reported to be considering a change of the mandates of the Federal Reserve to be in line with the government policy priorities. It is also reported that the new Department of Government Efficiency (DOGE) headed by Elon Must who fights waste and corruption in federal agencies is planning to make an spending efficiency audit on the Federal Reserve soon. Some media reports alert a possible removal of Gerome Powell from the post of Federal Reserve Chairman.
- Meantime, on March 12 the Central Bank of Canada cut its policy rate by 0.25 to 2.75% despite the expected rise in inflation above 2% target, citing its intension to prevent adverse impact of the US tariff war with Canada on consumption and business investment (Read the policy statement) and to help growth.
(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. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)
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 13 Economics and Banking Books and a large number of articles published.)
Source: Economy Forward
*The content in this article is of personal views of the author and does not reflect the opinion of LNW in any way.
