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Wednesday July 6th, 2022

Sri Lanka will control interest rates with OMO, direct bill purchases: CB Governor

ECONOMYNEXT – Sri Lanka will use instruments at its disposal including liquidity injections to stabilize interest rates, which has overshot in the opinion of the central bank Governor Nandalal Weerasinghe said.

Market interest rates have moved about double the policy rate hike from 7.50 to 14.50 percent, he said.

“That is why we think there is an overshooting,” Governor Weerasinghe said. “That is where we think we have to stabilize the interest rates. We have made some interventions.

“In the rupee interest rates we can give central bank financing to the primary market and through open market operations,” Governor Weerasinghe said.

He said the market has been allowed to play a role but the rates have overshot.

“In the rupee market we have instruments,” Weerasinghe said. “We have guidance as well as instruments.”

On Wednesday the central bank rejected most bids at the Treasury bill market which came at levels above 24 percent.

When the central bank buys the Treasury bills, rupee are injected to the market which can then trigger forex shortages, fuel shortages and power cuts when a 360 to the rupee is maintained in the forex market.

“We have rejected last bill auction,” Weerasinghe said. “We will continue to do this until interest rates moderate.”

A pegged central bank triggers currency crises primarily through open market operations to suppress interest rates.

Governor Weerasinghe had raised policy rates and market rates lending rates have moved to around 19.0 percent and deposit rates are also rising.

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