mainadimage
An Echelon Media Company
Sunday September 19th, 2021
Economy

Sri Lanka CB to guide markets, use tools mindful of repercussions: Governor Cabraal

ECONOMYEXT – Sri Lanka’s central bank will guide markets and deploy monetary tools mindful of repercussions, and guide markets in turbulent times, newly appointed Central Bank Governor Nivard Cabraal said.

“The policy measures must be taken,” Cabraal said, Cabraal told a forum of senior central bankers and finance officials after taking office as Governor for the second time on September 15.

“There are no short cuts. Sometimes there are tough policy measures to be taken.

“When we take policy measures there are always repercussions from another side. Sometimes if you do not take those policy measures you meander along.”

“When a tool is used, and one area is getting cured, it can emerge as a problem in another area,”

“It is not easy to manage this balance. You have to be conscious of all the outcomes that generally arise when you take certain policy measures.”

Cabraal was central bank chief from 2006 to 2014.

In 2008 during the Greenspan-Bernanke bubble when commodity prices rose and the country was in the midst of intensified civil conflict interest rates were raised to channel savings to the budget and avoid liquidity injections (money printing).

Fleeing foreign investors were accommodated through the peg with below 100 percent sterilization. Eventually the rupee was floated in 2009 the make the monetary base inconvertible and later re-pegged and foreign reserves re-built.

Cabraal said the central bank hoped to guide markets.

“We would need to lead the economy in these measures,” he said. “That means we have to be always one step ahead, two steps ahead sometimes three steps ahead.

“I think we would from now onwards take the lead in providing guidance to markets as well as the economy.

“We have got to take that step clearly and boldly so that the market would be able to read the signs that the central bank is making so that would need to use that guidance particularly in turbulent times like what we having now.

“This is not the time to abrogate that leadership role.”

Cabraal said he expected to seek the views of market participants and also staff.

He said some people wanted advice from outsiders like the International Monetary Fund but there was a lot of knowledge with in the bank.

“Once course of action is decided, it has to be steadfastly followed, he said.

Sri Lanka’s gross forex reserves are now down to 3.5 billion US dollars and net reserves depleted after record money printing not seen in the history of the soft-pegged central bank.

Central banks that print large volumes of money and lose reserves become helpless and market participants also become helpless as the newly injected liquidity creates forex shortages, hit the exchange rate and drives up asset prices.

When rate normalization is delayed and net foreign assets turn negative, a central bank itself can rapidly accumulate quasi fiscal losses and lose its ability to carry out policy, analysts say. (Colombo/Sept15/2021)

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *

Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *