Single policy rate in the offing as technical works ongoing: Central Bank

 The Central Bank is currently having technical level consultations in its bid to move away from the current dual policy rate and it reiterated that the single policy rate would be in operation before the end of the year.

Currently the monetary policy is communicated and implemented via two key policy rates. One is the Standing Lending Facility Rate (SLFR), the rate at which the overnight liquidity is injected to the banking system while the Standing Deposit Facility Rate (SDFR) is used to absorb excess liquidity in the banks.

The increase or decrease in the two rates signal where the Central Bank wants the yields of the government securities to be and where the lending rates and other rates elsewhere in the economy to go.

This in turn determines the level of liquidity in the system and thereby the direction of the economy.

On Wednesday, the Central Bank cut both SLFR and SDFR by 25 basis points to signal that they are committed to keeping the borrowing rates low to prop up economic growth.

Starting from June last year, they have cut the two rates by a cumulative 725 basis points.

With the introduction of a single policy rate, the bank will communicate its monetary policy via only a single policy rate, perhaps with a range.  

In the US, the monetary policy is communicated through their tweaks to what is well known as the Federal Funds Rate.

This is currently at between 5.25 percent and 5.50 percent, after raising to over 20-year highs starting from March 2022 when the rate was kept at between zero and quarter of a percentage point till then when the Federal Reserve slashed back rates in 2020 to support the economy beset by the pandemic.

Sri Lanka did nothing different during the same period but its officials are being vilified for doing so.