{"id":189651,"date":"2018-04-09T04:55:27","date_gmt":"2018-04-08T23:25:27","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=189651"},"modified":"2018-04-12T21:17:24","modified_gmt":"2018-04-12T15:47:24","slug":"now-that-cb-has-done-its-job-rw-harsha-should-pick-up-the-ball-play-the-game","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/now-that-cb-has-done-its-job-rw-harsha-should-pick-up-the-ball-play-the-game\/","title":{"rendered":"Now That CB Has Done Its Job, RW & Harsha Should Pick Up The Ball & Play The Game"},"content":{"rendered":"

By\u00a0W A Wijewardena<\/a>\u00a0\u2013<\/b><\/p>\n

\"\"<\/a>

Dr. W.A Wijewardena<\/p><\/div>\n

Partial and cautious relaxation of monetary policy<\/strong><\/p>\n

The Central Bank in its second monetary policy review in 2018, released last week<\/a>, has cautiously and partially relaxed the tight policy package it had introduced earlier when inflation was rearing its ugly head causing chaos to investment initiatives in the country.<\/p>\n

Accordingly, it has reduced the interest rate which it charges when cash-short commercial banks borrow from it to meet temporary cash shortages \u2013 known as Standing Lending Facility \u2013 by a quarter of a percent from 8.75% to 8.50%.<\/p>\n

However, it has kept the interest rate which it has to pay to commercial banks with cash surpluses when they temporarily park their surpluses with it \u2013 known as Standing Deposit Rate \u2013 unchanged at 7.25%. The net outcome has been to narrow the gap between these two rates from the previous 1.5% to 1.25%.<\/p>\n

The other monetary policy instrument \u2013 Statutory Reserve Ratio or the minimum amount of cash which commercial banks should compulsorily keep with the Central Bank based on the\u00a0deposits they hold \u2013 has been kept unchanged at 7.5%. Thus, the policy change has been both cautious and partial.<\/p>\n

Measure is expected\u00a0to stimulate economy\u00a0by lowering lending rates<\/strong><\/p>\n

Commercial banks have to use the Standing Lending Facility as the last resort when all other sources of raising temporary funds have exhausted. For instance, they are expected to meet the temporary cash shortages by borrowing from cash-rich corporate entities, selling the Treasury bills or bonds they hold in the REPO market and from among themselves, known as the Interbank Call Money Market.<\/p>\n

If there are no more funds in these sources, they have been given the facility by the Central Bank to borrow under the Standing Lending Facility. Hence, it represents the marginal cost of banks and when that cost goes down, it enables the banks to cut their lending rates as well. Hence, the measure is expected to stimulate growth by lowering the lending rates of banks. Since there is no change in the Standing Deposit Rate, the Central Bank expects that banks will not reduce the interest rates they pay to their depositors.<\/p>\n

CB has given a signal\u00a0to the market<\/strong><\/p>\n

The relaxation of policy is just by an insignificant 25 basis points, so called because it is 0.25% of one full percent which contains 100 such basis points. Hence, the effect is expected to work by giving a strong signal to the market.<\/p>\n

The signal is that the slowing economy is worrisome, the bank is ready to give relief through a cautious reduction in interest rates, there are bigger problems in the economy outside its control such as the stubborn budget, stagnant exports and ballooning imports and the real challenge is to complete the reform program to put the economy back on the long-term growth path.<\/p>\n

The justification of the bank\u2019s cautious move was done in the press briefing by its Director of Economic Research in English and the Deputy Directors of Economic Research, one in Sinhala and the other in Tamil.<\/p>\n