Sri Lanka watching budget, global rates before cutting rates: CB Governor

ECONOMYNEXT – Sri Lanka did not cut rates, despite money and credit growth stabilizing, because global interest rates were rising, and the central bank wanted to watch how budget deficit was behaving, and oil prices were also high, Governor Indrajit Coomaraswamy said.

“Clearly if there has been a loosening of monetary policy it would not be wise to loosen monetary policy at the same time,” Central Bank Governor Indrajit Coomaraswamy said.

In 2015 the central bank cut rates in April and poured tens of billions of liquidity tied up in term repos as budgets deteriorated and oil prices were cut amid warning from economic analysts.

The central bank then generated a balance of payments crisis and high inflation despite soft global commodity prices as the rupee collapsed.

This week the central bank held rates unchanged, as political instability exploded with the ruling coalition suffering humiliating defeat amid massive securities scam and alleged cover up. and the ruling coalition was at a cross-roads over its future direction.

Coomaraswamy said a quick return of political stability will help. Investors would prefer to see political stability he said.

He said advanced economies were recovering and rates were moving up as central banks ‘normalized’ monetary policy, especially in the US.

“Given that we seeing international interest rates going up,” Coomaraswamy said. “In a context where money is beginning to move from emerging markets generally to advanced markets because of interest rate developments to reduce rates could lead to incentivising outflows.”

Foreign bond holders had already been selling amid political uncertainty over the last few days as well as moves to tax them. But now it has been indicated that they may not be taxed.