Saturday, January 23, 2021
Follow Us
Rs. 185 b in excess liquidity: CB

The Central Bank (CB) yesterday said there was Rs. 185 billion excess liquidity in the market, partly due to the monetary institution purchasing foreign exchange from the market.

The CB has also purchased Rs. 566 billion worth of Government securities from primary markets, largely to support the Government in the context of reduced earnings and increased expenditure, Economic Research Department Director Dr. C. Amarasekara said.

“But these excess funds are unlikely to result in higher inflation. What we need to understand is we are in a very different situation because aggregate demand is very low, and so there will be no demand-driven inflation or overheating of the economy. Non-food inflation and core inflation remain low.”

The Monetary Board at its meeting held on 25 November was of the view that the prevailing surplus liquidity conditions provide sufficient space for a further reduction in market lending rates without an adjustment to policy interest rates. Accordingly, the Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the CB at their current levels of 4.50% and 5.50%, respectively.

However, responding to questions raised, Dr. Amarasekara conceded there were public concerns, particularly from senior citizens about reduced interest rates impacting their income. As a temporary measure the CB has appealed to banks to halt reducing interest rates on senior citizens.

“It is clear that long-term there is a need to encourage alternative pension funds to provide solutions to this issue. Financial markets should consider annuity and life insurance schemes among others for senior citizens. The Budget has a proposal to introduce a self-contributory pension scheme for the informal sector, and measures such as these are the best options so the overall interest rates are not affected by the issue of senior citizens,” Amarasekara added.

(FT)