Policy Rates; Is It Driven By A Divine Power ?
By Mahesh Senanayake –June 20, 2016
Mahesh Senanayake
Policy rates is not something that the common folk would consider as a topic in their day to day life, especially in a country where there are many things to worry about as the sun does its daily chores quite unaffected by the long wait to bring the culprits to book and forfeit of assets of those who indulged in self-aggrandizement while in office, or the immunity given to the corrupt public officers and private deal makers. However during the recent past this highly technical term has been used to promulgate certain economic theories at its best while, sadly its being used to foster either personal agendas or political credos of certain fractions and individuals. This writer has reason to state so .
The policy rate of a country is a key monetary tool used to achieve macro economic objectives like inflation, consumption, growth and liquidity. The importance of the policy rates for an average citizen is that it could influence certain decision in the day to day life of average individual without knowing that such decision are made on the outcome of policy rate. Based on the signals given by the policy rates, general interest rates of the country at which our consumption, savings & investment decision are made by the individuals, is moved in either direction. It is not the result of wishful thinking of any average person as the decisions on policy rates should be taken after careful study of the relevant dynamics and indicators prevailing in the economy .In sri Lanka it is the Monetary board of the central bank who takes the decisions after observing the recommendations made by Money and Banking division of the Economic Research Department (ERD) of the Central Bank- the apex organization that handles the monetary and fiscal policies of the country . For recommending policy rate decision, the ERD observes large numbers of indicators and use variety of economic analysis. The bank has employed its best brains for the above process & has invested large number of resources for building up the decision making capability of the ERD.
The policy rates, in contrasts to criticism can not be decided through a haphazard process as it directly influences the market interest rates which in turn influence the key economic indicators such as inflation, bank interests rates , exchange rates etc
As mush as the term “policy rates” has become a vibe in the socio political domain, despite the general public is not quite interested to know, some individuals and political parties are seemingly making attempts to paint a picture that will favor their agenda and that will create a total wrong picture of the economy. Strangely some of the critics of the policy rates are respected individuals who have worked directly or indirectly with thecentral bank, who are presenting a view that will reverse the practices that they have followed during their tenure /service with the CB.
One such argument is that the policy rates should be used as the sole tool to control market interests rates which is quite questionable as there should be some stability in policy rates in order for any industry to work with predictability. Therefore policy rates can not be changed as and when one would wish to do and on the other hand the policy rates are not decided months ahead , it is decided as per the prevailing status of the economy and in the best interests of the same economy meaning that policy rates are not changed as a regular practice. It happens when the need arises to do so. In simple terms, one cannot expect the Monetary Board to take panic decisions, increasing the policy rates in one sitting & decreasing it soon after. Rather, CB would wait & see if the signal coming through careful observation of certain variables are pointing a permanent situation. This is the practice of the other Central banks in the world.in this regards, Central Banks have many occasion disappointed patientless market participants.
