CB brings down bill stock signalling unwinding of liquidity injection spree

The Central Bank has brought down its bill stock during the last couple of weeks, indicating that it was gradually unwinding its monetary stimulus unleashed by way of continuous purchasing of Treasury bills and bonds on behalf of the government, which partly caused the current external sector woes and soaring prices across the economy. The unwinding of the bill stock by the Central Bank also comes at a time when the mostly watched United States Federal Reserve also considering to quicken the pace of the tapering of its monthly bond buying programme, which will enable it to raise rates early to cool down inflation.

According to the latest data on daily operations, the stock of government securities held by the Central Bank came down to Rs.1,414.67 billion by the end of last week, from a peak of Rs.1,469.84 billion on October 15. The Central Bank bill stock stood at Rs.78 billion on March 11, 2020, when Sri Lanka detected its first coronavirus case and since then, the Central Bank provided a massive amount of liquidity to the government and banks to blunt the effects of the pandemic and also to help economic recovery.  

The regularisation of the bill and bond auctions during the last few weeks helped the Central Bank to scale down its holdings. 

But they still remain at an all-time high after the Central Bank bought the unsubscribed bills and bonds through printed money, as the auctions became dysfunctional by the yield controls, which continued through mid-September. 

The yields, which shot up in the immediate aftermath of the lifting of yield curbs, started levelling off and easing thereafter in the last five weeks, prompting the continuation of the current monetary policy. 

“Yields on government securities, which increased notably, have stabilised with enhanced subscriptions at primary auctions, reflecting improved market sentiments,” the Central Bank said.  

Commenting on the development, Central Bank Governor Ajith Nivard Cabraal said it also played a part in the decision to maintain the policy rates at the final monetary policy meeting on November 24. 

“During last month, we were able to raise the required amount of money in the Treasury bill market. There were also signs that the interest rate has also gradually eased. This shows that the Monetary Policy is being transmitted into the market gradually,” Cabraal said. 

“This is also one of the reasons why we decided to continue the trend,” he added in reference to the Monetary Board’s decision to hold rates. 

The full subscription of the bills and bonds at the auctions reflects that the funds are raised from the market, instead of printed money, which create inflationary pressures.