Benchmark Treasury bill rates stayed flat at this week’s primary market auction as Sri Lanka’s financial markets comfortable with the Central Bank’s loose monetary policy stance in the face of rising food prices.Dealers said there was little the Central Bank could do in the face of supply side constraints due to extensive crop damage caused by the floods which were mounting pressure on prices. Also, a weakening dollar caused by expansionary monetary policy (printing money) in the US was putting pressure on global commodity prices.
"There is nothing the Central Bank can do with its monetary policy because this is a supply side issue and with crops expected to recover within a few months, prices are expected to stabilise. But I believe, the Central Bank could cut policy rates further so that credit growth would be given a boost and economic activity can recover faster from the devastating floods," a dealer told The Island Financial Review.
Commercial bank dealers said they had no reason to believe that inflation was a demand side issue, or that the Sri Lankan economy was overheating, as the International Monetary Fund pointed out last week.
Dealers of some of the country’s biggest banks said they expected monetary policy rates to stay where they are for some time to come, with some suggesting there was room for a downward revision, confident the Central Bank was keen to maintain inflation at single digit levels this year.
Going against the regional trend...
However, some dealers said keeping inflation low was going to be tough challenge.
"Sri Lanka is going against the regional trend and is maintaining a loose monetary policy stance. Many countries have increased their rates to curb high inflation caused by rising global food prices caused by bad weather and a weakening dollar. We have always gone against the region, but there is too much pressure on prices and the Central Bank is going to find it difficult to contain inflation," a dealer said.
Flat rates...
The Treasury bill auction saw yields close flat, with the three-month Treasury bill rate dropping marginally to 6.99 percent, which is below the overnight repurchase rate of 7 percent. Bills for this tenure attracted bids amounting to Rs. 6.52 billion of which the Public Debt Department of the Central Bank accepted Rs. 2 billion.
The six-month bill saw its yield remain unchanged at 7.09 percent after bids amounting to Rs. 11.97 billion resulted in Rs. 6.12 billion of them being accepted by the Central Bank. The one year Treasury bill attracted bids amounting to Rs. 14.63 billion of which Rs. 5.4 billion was accepted and its yield too remained unchanged from a week ago at 7.33 percent.
The entire auction was for maturing bills amounting to Rs. 11 billion. Total bids amounted to Rs. 33.12 billion of which the Central Bank accepted Rs. 13.52 billion.
Dealers said high liquidity levels in the financial system, low short term inflation expectations and uncertainty on the longer term resulted in the way the market behaved at the auction. Excess rupee liquidity in the financial system was still too high closing at Rs. 111 yesterday (9).
"With so much money, banks are looking at ways to invest it and this is the main reason why Treasury bill rates remained flat," a dealer said.
Benchmark...not quite...
Treasury bill rates are often referred to as benchmark rates because the movement in market interest rates could more or less be gauged by looking at the behaviour of benchmark rates and they respond to policy rates.
"When inflation is too high it will not mean that policy rates would be increased and that benchmark rates would move up as well. When inflation was 20 percent a few years ago (2008), and market interest rates were in the higher twenties, benchmark rates were around 10 to 15 percent, and policy rates were much lower. This is because authorities have other tools that can be used to contain inflation," a dealer said.
Some of the new currency notes issued by the Central bank
The Island
