Policy rates is not something that the common folk would consider as a
topic in their day to day life, especially in a country where there are
many things to worry about as the sun does its daily chores quite
unaffected by the long wait to bring the culprits to book and forfeit of
assets of those who indulged in self-aggrandizement while in office, or
the immunity given to the corrupt public officers and private deal
makers. However during the recent past this highly technical term has
been used to promulgate certain economic theories at its best while,
sadly its being used to foster either personal agendas or political
credos of certain fractions and individuals. This writer has reason to
state so .
The policy rate of a country is a key monetary tool used to achieve
macro economic objectives like inflation, consumption, growth and
liquidity. The importance of the policy rates for an average citizen is
that it could influence certain decision in the day to day life of
average individual without knowing that such decision are made on the
outcome of policy rate. Based on the signals given by the policy rates,
general interest rates of the country at which our consumption, savings
& investment decision are made by the individuals, is moved in
either direction. It is not the result of wishful thinking of any
average person as the decisions on policy rates should be taken after
careful study of the relevant dynamics and indicators prevailing in the
economy .In sri Lanka it is the Monetary board of the central bank who
takes the decisions after observing the recommendations made by Money
and Banking division of the Economic Research Department (ERD) of the
Central Bank- the apex organization that handles the monetary and fiscal
policies of the country . For recommending policy rate decision, the
ERD observes large numbers of indicators and use variety of economic
analysis. The bank has employed its best brains for the above process
& has invested large number of resources for building up the
decision making capability of the ERD.
The policy rates, in contrasts to criticism can not be decided
through a haphazard process as it directly influences the market
interest rates which in turn influence the key economic indicators such
as inflation, bank interests rates , exchange rates etc
As mush as the term “policy rates” has become a vibe in the socio
political domain, despite the general public is not quite interested to
know, some individuals and political parties are seemingly making
attempts to paint a picture that will favor their agenda and that will
create a total wrong picture of the economy. Strangely some of the
critics of the policy rates are respected individuals who have worked
directly or indirectly with the central bank, who are presenting a view that will reverse the practices that they have followed during their tenure /service with the CB.
One such argument is that the policy rates should be used as the sole
tool to control market interests rates which is quite questionable as
there should be some stability in policy rates in order for any industry
to work with predictability. Therefore policy rates can not be changed
as and when one would wish to do and on the other hand the policy rates
are not decided months ahead , it is decided as per the prevailing
status of the economy and in the best interests of the same economy
meaning that policy rates are not changed as a regular practice. It
happens when the need arises to do so. In simple terms, one cannot
expect the Monetary Board
to take panic decisions, increasing the policy rates in one sitting
& decreasing it soon after. Rather, CB would wait & see if the
signal coming through careful observation of certain variables are
pointing a permanent situation. This is the practice of the other
Central banks in the world.in this regards, Central Banks have many
occasion disappointed patientless market participants.
Further another proposition put forth by these commentators is that
policy rates are only decided by the monetary board and the governor and
the respected members of the monetary board would leak out the
information months ahead which is a diabolical lie and misleading the
public. Firstly, the monetary board is advised by the relevant
department in the CB and secondly the respected members of the monetary
board would not act in an unethical manner by leaking sensitive
information, thereby risking loss of reputation which they have built
over the years.
Meanwhile contradictory arguments can also be seen where the same
writer recommends lowering the policy rates in one piece of writing and
immediate raising of the policy rates on the subsequent article.
The criticism at its worst status, is directed towards the governor
of the CB and the rest of the monetary board that they would leak the
policy rates to their friends relatives or any other known parties which
does not bear any truth as explained above. The attempts are clearly
made to drive a point home that the incumbent monetary board takes a
sole discretion on deciding the policy rates which is an attempt to
tarnish the reputation of the members of the monetary board .
Finally some attempts are made to show that the policy rates are
decided by using a divine power which perhaps would have been done by
the same critics without paying due attention to the realistic status of
the economy in order to pacify and ratify political agendas of the day
when they were working with the Central Bank or any other connected
organization .Otherwise how would such erudite critics come up with
totally misleading and irrelevant arguments ? Let us not believe in
divine powers to run the economy or formulate policies or relevant
“rates and numbers”, instead let us first understand the real status of
the economy and move forward. (ColomboTelegraph)
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