Sri Lanka call rates edge up to support stability

ECONOMYNEXT – Sri Lanka’s short term rates have risen about 30 to 40 basis points to help restore monetary stability lost during August in the wake of tens of billions of rupees printed to lower the call money rate artificially.

The average weighted overnight call money rate rose to 7.60 percent on September 04, from a low of 7.29 percent August 26, when banks deposited 30 billion rupees in the excess liquidity window.

The interbank gilt-backed call money rate went up to 7.61 percent on September 04, from 7.30 percent on August 23.

After printing money and also making a sudden disruptive sell-down of Treasury bills the reasons for which are not clear, the central bank cut rates 50 basis points on August 23 and enforced it with printed money.

The monetary board set a rate of 8.0 percent to inject money and 7.0 percent to drain liquidity. On August 18 billion rupees were injected overnight at 7.49 percent.

A 6.0 billion rupees was injected for 14 days also at 7.49 percent which is about 50 basis point below the rate set by the monetary board.

Another 2 billion rupees 295 day money was injected at 7.83 percent.

There is no law compelling the central bank to inject money at Sri Lanka Interbank Offered rate plus a premium or to stop the agency from giving money below the ceiling policy rate.

Rates ct were in May without printing money. At the time call rates were artificially help up, by draining liquidity from dollar purchases amid a balance of payments surplus from weak credit.

In the up to the current bout of monetary instability, excess liquidity was pushed up above the rate signaled by the balance of payments by enforcing a strong side convertibility of the peg (purchasing dollars), by injecting money below the ceiling policy rate through overnight, term and outright purchases of domestic assets.

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Up to 25 billion rupees was ‘helicopter dropped’ on the monetary base overnight, analysts say.

A pegged central bank which is buying dollars to build up reserves, and is mopping up inflows to keep the peg strong, will de-stabilize the currency, trigger a balance of payments deficit by injecting money from the purchase of domestic assets.

In the process the pegged central bank will miss its foreign reserves target set by the International Monetary Fund.

The instability tends to spook foreign investors, importers and exporters. Sri Lanka’s private credit has been weak or negative up to June.
It is not clear whether there was a spike in credit in July, especially from deteriorating budgets. It is not clear why money was printed to cut rates amid a deteriorating state finances. (Colombo/Sept05/2019)

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