Practicalities and economic substance in explaining current market interest rates and monetary board actions
Sanjeewa Fernando
May 17, 2016
There is a series of articles being published recently discussing certain aspects in the economy, monetary policy measures, government securities market and banking sector. From the perspective of an average person, some articles warrant further clarifications and responded with another dimension of opinions, practicalities and data as evidence. Opinions and comments should be backed by data to prove the position.
Some constructive criticisms published these days seem to be directional but do not carry a single position as they contradict the own opinions in the same article or different articles written at different times by the same writer. One such recently published article says CBSL policy rates should be adjusted up to increase the market interest rates so that inflationary pressure can be curtailed. However, the particular article criticizes increase in the general interest rates due to the increased Statutory Reserve Ratio (SRR) for commercial banks by CBSL. The same article further explains that market interest rates have increased above the CBSL policy rates due to excessive borrowing by the Government and this has given arbitrage opportunities for market participants. In another place of the article, it states that market interest rates have currently increased as a results of CBSL selling dollars in the market and on the other hand printing money through lending to the financial institutions. According to these articles, all actions taken by the Monetary Board in the recent past are wrong and have no economic substance. For them, there are lot of distortions in the market due to the actions by the Monetary Board. For rational analysts most of these criticisms are non-other than blame games. For a rationale reader, these constructive criticisms are too vague to gauge the most desirable action because these criticisms do not show one position.
