The monetary board under the stewardship of new Central Bank Governor Arjuna Mahendran decided to maintain key policy rates unchanged for the twelfth straight month as widely expected, and shattered hopes of the banks which were eagerly awaiting a scrapping of the two tier Standing Deposit Facility Rate.The new monetary board considered the current accommodative monetary policy largely appropriate given the benign price pressures and the economic growth being at healthy levels and they believe the administered price reductions announced in the ‘100 days program’ will further reduce inflation.


As a result, the Central Bank left the repurchase rate or the Standing Deposit Facility Rate at 6.5 percent and the reverse-repurchase rate or the Standing Lending Facility Rate at 8 percent. Governor Mahendran speaking to Bloomberg TV last morning, drew parallels between the Chinese and Sri Lankan economies as both have characteristics of high investments and tepid domestic consumption as well as the anticorruption movements pursued by both governments.Hence, he is of the belief that the current monetary policy is geared mainly towards increasing domestic consumption, shifting its aggressive focus on investments which were driven mainly through mega infrastructure projects during the last 6 year.


The People’s Bank of China cut its benchmark one-year lending rate by 40 basis points to 5.6 percent; the first rate cut since July 2012, along with the one-year deposit rate by 25 basis points to 2.75 percent in a desperate bid to oil the wheels of the slowing economy.Chinese economy cooled down to 7.3 percent in the Q3’2014, the weakest expansion since the global financial crisis.The Prime Minister, Ranil Wickremesinghe too echoed the same sentiments a month ago when he met the business community. As he pointed out the immediate requirement is to increase the aggregate demand of the economy and the promised salary increments and the other giveaways would just do that.


However, Sri Lankan economy can easily go awry due to prolonged period of accommodative monetary policy as cheap credit could easily turn into cheaper imports and shake the fragile external sector as the economy has no strong manufacturing sector.Mahendran spent most of his career overseas in the banking sector and considers his appointment as an opportunity to serve his motherland.Meanwhile, the widely expected removal of the access to SDF at 5 percent, whenever a bank parks its excess liquidity more than thrice a month was left unchanged.


Further, the Statutory Reserve Ratio too remained at 6 percent.The entire country now awaits how the fiscal policy will unfold in relation to the monetary policy on tomorrow’s interim budget which is likely to have the bag full of election goodies pledged in the run up to the presidential election.The interim budget is expected to announce Rs.5000 salary increment to public servants, reduction of gas and electricity prices and removal of taxes on 10 essential items.However, economists have already cautioned that any salary increment to public servants with no links to productivity improvements will increase the inflation amid many other economic ills.