ECONOMYNEXT – Sri Lanka has raised ceiling rate for 12-month Treasuries by 02 basis points to 5.25 percent, for this week’s Treasuries auction where 56 billion rupees of bills will be offered.
The ceiling policy rate has operated as a de facto policy rate through which large volumes of debt is monetized when the central bank purchases bills with printed money to defend a pattern of Treasuries yields leading to a failure of the auction, despite there being demand at a higher rate.
In recent months demand has concentrated around 3-month bills with market participants expecting rates to move up and a gap developing between the one year price control and the two year bond.
On July 07 the central bank, which is acting as agent to the Treasury sold 44.9 billion rupees of bills after offering 48 billion rupees.
Over 900 billion rupees worth Treasury securities are already held by the central bank.
When private credit is weak, the central bank is sometime able to sell most of the maturing bonds and also sell down a part of its stock without contributing to new forex shortages.
On settlement day the central bank sold down over 3 billion rupees of bills taking the stock to 917 billion rupees from 921 billion a week earlier.
Sri Lanka defence of the Treasury bill yield is reminiscent of the US Fed defending the yield on Liberty Bonds in the secondary markets in the early 1950s which triggered a global commodity bubble and inflation domestically and almost led to a collapse of the Bretton Woods system prematurely.
Mercantilists generally refer to the Liberty Bonds bubble as the Korean War boom.
EN’s economic columnist Bellwether says the US dollar was saved primarily by the actions of Fed Governor Marriner Eccles, a banker in the style earlier classical economist who knew how central banks worked, and was supported by William McChesney Martin, who was in the Treasury at the time.
Martin was later made Fed Chairman.
“The actions paved the way to the so-called Treasury Fed Accord, which led to Fed’s independence from the Treasury,” Bellwether says.
“The Bretton Woods peg system survived until Martin was Fed Chairman. The pegs collapsed a couple years after he was forced to resign by President Richard Nixon, who appointed Arthur Burns who engaged in output gap targeting.”
“This type of action shows that a monetary authority is defending interest rates a final target.” (COLOMBO/July12/2021)