Central Bank commences new revenue avenues to expand the balance sheet

Central Bank had begun to buy bonds in its open market operations, Central Bank Governor Dr Indrajit Coomaraswamy told the press following the announcement of monetary policy on Friday. The Central Bank's Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) remained at their existing 7% and 8% rates, respectively.

The Central Bank has begun to provide financing for liquidity to individual primary dealers. "We have expanded the reach of open market operations to include some liquid bonds," Coomaraswamy said. It was just treasury bills in the past. Now it's a few liquid bonds.

The governor put forward reasons for rule relaxation. He said, "Kristalina Georgieva has shown that this year, 90 per cent of the world's countries are growing slower.” There is a belief that the global economy is undergoing a synchronised slowdown.

That argues for some monetary policy easing which gives us space for intervention in domestic policy. Unlike in 2018, when there was such an external climate that limited the room for local policy action, we now have more space.

The governor has put forward reasons to loosen legislation. He said, "In the short run, inflation is likely to rise. Inflation in food prices has risen. The annual rises in fish prices and vegetable prices have also increased some of the factors. The production of Yala was less than expected. We had a perfect Maha, but a little less was the Yala. Hence, it might put pressure on the prices of rice. The rate of inflation is expected to rise to the upper end of the 4-6 per cent inflation target. We have to be alert. Clearly, in an inflation-targeting regime, the inflation target is the main target.”

Most central banks globally have lowered interest rates. India's Reserve Bank has lowered interest rates to counter India's economic slowdown. Accommodation, food service, and transportation services have contracted following the attacks on Easter Sunday.

OSL Take: The call by the Central Bank of Sri Lanka for private investment banks has opened up an investment opportunity for foreign businesses/investors. Sri Lanka’s economic indicators show the country is heading in the right path to development, and the government’s development agenda would also help in this aspect. Therefore, foreign businesses/investors could invest in Sri Lanka without having any doubts.

VBS/AT/20191105/Z_TB3