CB profit transfers lift money market liquidity; Jan. credit to govt. spikes

Profit transfers from the Central Bank during February propelled the market liquidity in the overnight money market while the banks lent heavily to the government via treasury bills and bonds in the month earlier, as demand for private sector credit is yet to return to a meaningful level.  

The Central Bank in February transferred Rs.24 billion profits, bringing up the total outstanding money market liquidity to a surplus of Rs.41 billion by the end of last week, from a deficit of Rs.5.5 billion on February 7, after hitting a weekly peak of Rs.48 billion on February 28.

Besides that profit transfer, banks parked Rs.35.1 billion at the Central Bank’s standing deposit facility window on March 6, which also helped the overnight liquidity. 

However, the dealers were clueless of such a profit transfer and they were completely caught off-guard of the sudden increase in the money market liquidity in the 
recent few weeks. 

Meanwhile, the Central Bank profit transfers to the government in the form of liquidity have also been questioned by various quarters. 

They charge there is lack of clarity from the Central Bank on this issue. 

Meanwhile, the credit to the government by the banking sector in January has spiked by Rs.119.9 billion, up from Rs.65 billion in December 2019.

Banks have been investing their excess cash in government treasury bills and bonds, which are considered risk-free assets in the absence of meaningful private sector credit growth. 
During January, credit to the private sector increased by only Rs.0.2 billion, recording only a 4.5 percent growth on a year-on-year basis, up from 4.3 percent in December.

The Central Bank last week however maintained its 12 to 13 percent expected growth in the private sector credit for the year but did not rule out the actual demand could fall short of its projections. 

Responding to a question by the media, Senior Deputy Governor Dr. Nandalal Weerasinghe said the Central Bank is less concerned about the growth in the monetary aggregates, as it has shifted focus from money targeting to inflation targeting, when setting its monetary policy.