ECONOMYNEXT – Sri Lanka does not have a peg but manages the rate ‘flexibly’, Central Bank Governor Indrajit Coomaraswamy said, an arraignment which will be continued under a modified flexible inflation targeting regime in the future.
"In the past we tried to defend a particular rate," Central Bank Governor Indrajit Coomarasway told a forum organized by the Ceylon Chamber of Commerce.
"A peg – soft peg or hard peg – we don’t have any peg anymore though people are constantly writing that we have some peg or the other.
"We have no peg, but what we do is intervene in the market from time to time to prevent very disruptive and disorderly adjustment of the exchange rate.
"Otherwise we broadly let the exchange rate find its own level."
Some analysts have pointed out that Sri Lanka has an extremely unstable sterilizing soft–peg, where intervention are offset in both directions. In 2018, the rupee fell from 153 to 182 to the US dollar as dollars sales to defend the currency was ‘sterilized’ or off set with newly created money.
At the moment money created from the dollar purchases amid weak credit is being mopped up which tends to strengthen the currency.
The central bank has allowed some liquidity to remain in the banking system so that banks can easily give loans if required and rates to fall towards the policy floor rate of 7.50 percent.
Analysts have suggested that the central bank stop defending interest rates at 7.70–7.79 percent levels through repo operations and allow overnight rates to fall to 7.50 percent. (Colombo/July19/2019)