High interest rates have prevented contraction of economy – CBSL Governor

By Hiran H. Senewiratne

The Central Bank did not contract the economy by hiking interest rates, but prevented a further contraction and possible hyper- inflation by stabilizing the external sector with high rates, Central Bank Governor Dr. Nandalal Weerasinghe said.

“The Central Bank by tightening monetary policy, minimized the damage that was going to happen to the economy, Dr. Weerasinghe told the Central Bank Monetary Policy Review meeting yesterday at the Central Bank Auditorium.

Dr. Weerasinghe added: “If we did not implement a tight monetary policy by raising interest rates, we could have had a double-digit contraction and 100 per cent inflation or hyperinflation.

‘A modern central bank destroys growth or triggers output shocks generally with stimulus, where banks are encouraged to give credit with money injected through open market operations.

‘In a soft-pegged or flexible exchange rate initiated by a central bank, which is not a clean float, such injections also trigger forex shortages long before the results of such inflationary policy show up in consumer price indices.

‘Sri Lanka suppressed rates for two years by printing large volumes of money before I took office. Sri Lanka’s economy is expected to contract by around 7-8 per cent in 2022.But we could prevent the forecast of three per cent minimum growth if the IMF negotiations are successful.

‘The Monetary Board of the Central Bank of Sri Lanka (CBSL) has decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank at their current levels of 14.50 per cent and 15.50 per cent, respectively.

‘I am of the view that the maintenance of the prevailing tight monetary policy stance is imperative to ensure that monetary conditions remain sufficiently tight to rein in inflationary pressures.

‘Such tight monetary conditions, together with the tight fiscal policy, are expected to adjust inflation expectations downward, enabling the Central Bank to bring inflation rates towards the desired levels by end 2023, thereby restoring economic and price stability over the medium term.

‘Inflation is the major issue and it would likely come down towards the end of this year to a stable position with the current policies, moving forwards in this manner.

‘Food inflation which was very high is likely to come down in the coming month.’