CB pauses further rate cuts, awaits full transmission to real economy

•  Sees more room for market interest rates to come down before further policy rate cuts
•  Key rates slashed by a further 100bps last week, bringing total rate cuts to 650bps
•  Benchmark market lending rates have responded but conditions still remain restrictive 

The Central Bank says it would hold off further rate cuts for some time, at least until the past rate cuts are fully transmitted into the real economy by way of further ease in the market lending rates, as the monetary authority still sees more room for such market rates to come down to ensure a faster recovery in the economy. 
“The board viewed that, with the reduction of policy interest rates and based on the available information, further monetary easing will be paused in the near term, given the space for market interest rates to adjust downwards, in line with the current and past monetary easing measures,” the Monetary Policy statement issued last Friday stated.
It is often said that there are long and variable lags in the monetary policy and thus, the policy measures taken thus far could be felt through the economy in the next few weeks and months to come. 
In the United States however, a debate is building up in economic circles if the monetary policy still commands the same influence as it did a few decades ago, in making the changes it aims to do, due to the faster progress made in the digital economic activities and of course, the distortions created by the pandemic. 
For example, even though a significant majority anticipated that the rapid rate hikes by the US Federal Reserve would push the economy into a recession, this outcome has not materialised. 
Contrarily, the US consumer and job market continues to exhibit relative strength, albeit with signs of softening, leaving economists and analysts perplexed.
This has however enabled the Fed to engineer a so-called economic ‘soft-landing’, a situation where inflation is brought under control without stoking unemployment and causing a recession. 

Sri Lanka’s Central Bank last week cut its key rates by 100 basis points, the fourth time since it pivoted to monetary easing in early June and the last time for the year, bringing the total cuts in the key policy rates thus far to 650 basis points, to 9.0 percent and 10.0 percent, respectively. 
The rate cut implemented last week allowed the Central Bank to achieve single-digit policy rates in approximately 20 months, marking a potentially unprecedented pace for a central bank. This swift accomplishment is attributed to a faster-than-anticipated decline in consumer prices.

However, some argue that the financial conditions still remain tight, as it might take more time to be able to raise money at affordable levels to support their investments and consumption activities. While the key benchmark market lending rates have responded to the monetary easing measures, it appears that their decline isn’t sufficient enough to trigger a broad-based increase in lending activities. 
“The board anticipates a swift, sizable, broad-based reduction in overall market lending interest rates, in line with the monetary policy easing measures effected since June 2023. Such adjustment in interest rates is imperative to ease the domestic monetary conditions further,” the policy statement said. 
“The board stressed the need for all licensed banks to take swift measures to reduce market lending interest rates, to ensure that the benefits of the series of monetary policy easing measures are adequately passed on to businesses and households,” it added.