SC Securities makes case for further monetary tightening to keep prices in check

• CB is walking a tightrope addressing imbalance in economy and supporting pandemic-hit economy
• SL’s prices are on an upward trend due to higher commodity prices and supply-side disruptions  

Further increase in interest rates would be needed to arrest the exponential rise in the country’s consumer prices, which rose to a 12-month high in July, said SC Securities, igniting the debate over the future course of the monetary policy in Sri Lanka. 

The Central Bank is faced with the difficult choice between making its money policies tight enough to keep the growing economic imbalances in check and supporting the pandemic-ravaged economy. 

The Central Bank on August 19 raised benchmark policy rate, at which the overnight liquidity is injected to the market, by 50 basis points, while raising the banks’ statutory reserves ratio by 200 basis points, 

with the aim of absorbing overnight liquidity, predominantly to address the anomalies in the foreign exchange market and partly as a pre-emptive tactic to keep prices from rising. 

But the Central Bank maintained that it hadn’t changed course from its more than two-year long easing cycle and said its actions were only aimed at smoothening out the excesses and the imbalances. 

However, SC Securities, a stockbroking firm, in a recent report joined many others who interpreted the moves as the beginning of many corrective steps towards further tightening of the monetary policy. 

Its assertion is however based predominantly on the rising consumer prices, which accelerated to a 12-months high of 6.8 percent in July, from a year ago, measured based on the National Consumer Price Index (NCPI). 
“The latest release confirms most of our assertions that this has been a rising trend since the commencement of the year,” SC Securities, which is a subsidiary of Sampath Bank PLC, said referring to the latest NCPI index-based inflation. 

“The rising inflation rate will inevitably put more upward pressure on policymakers to revise up the interest rate further in order to quell the pressure exerted by a rising inflation,” it added.

However, the Central Bank maintains that there is no tangible indication of demand-driven inflation and much of the recent price pressures were caused by the high global commodities prices and interruptions to supply chains caused by the pandemic-induced restrictions. 

Most central banks in the world have either rolled back or have indicated that they are on track to dial back their record stimulus unleashed since last year, after which the demand conditions could normalise.