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Sri Lanka has scope to cut rates: Cabraal

STAGFLATION: Sri Lanka’s growth usually falls and inflation picks up after a currency collapse.

ECONOMYNET – Sri Lanka has scope to cut rates, Senior Economic Advisor to the Finance Minister Nivard Cabraal said after the government cut taxes to boost growth.

“In my view there is scope for the central bank to cut rates,” Cabraal told foreign correspondents in Colombo.

“I feel the central bank will look at it in a way that everything gels together. I feel that at some stage that there has to be congruence of all these policies, so that we get back to a growth agenda.

“Sri Lanka having an eye on the growth agenda and still keeping an eye on inflation to make sure it does not get out of hand.”

Sri Lanka’s last government hiked taxes under a so-called ‘revenue based fiscal consolidation’ strategy advocated by the International Monetary Fund, which indicated that keeping deficits down by cutting state spending was somehow inappropriate, allowing them to boost state salaries and subsidies.

The new administration said state spending was unproductive, and wanted to try and squeeze spending for a time.

Newly appointed central bank Governor W D Lakshman is to announce his first monetary policy decision on December 27.

Cabraal said current interest rates were too high compared to inflation.

Sri Lanka previous central bank Governor Indrajit Coomaraswamy also said that Deputy Governor Nandalal Weerasinghe had pointed out that real interest rates were too high and slammed price controls on bank lending, going into unprecedented state control.

Analysts however have warned that given past trends, while inflation may be muted immediately after a currency collapse, the altered price structure in the island will begin to reflect as soon as economic activity picks and demand comes back.

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Interest rates in any case cannot be compared to historical inflation but to future inflation.

Governor Coomaraswamy however has said that after spiking to 6 percent inflation will fall in 2020.

Cabraal said investor interest is picking up and current outflows in capital markets will reverse as confidence grew helping the exchange rate and growth.

Analysts have however blamed monetary instability involving liquidity injections to enforce rate cuts and currency collapses for high nominal rates.

High nominal interest rates have been seen in all countries including the US and UK or even China until a consistent non-conflicting monetary policy of either a consistent peg or floating rate is adopted analysts have pointed out.

Collapses of soft-pegs – called a flexible exchange rate in Sri Lanka – are usually followed by periods of stagflation. (Colombo/Dec25/2019)

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