Monetary Policy Review, October 2013

I do not answer people who can,understand things

I ask them to follow a course on effective Reading and hearing

People who do not know read effectively understand only what they think They cant understand what the writer says

I sympathies  uneducated follows who can't  understand what i say and make
baseless allegations

I never blame MR
I always blame jokers who mislead him

Antonym wrote:Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. Here's why:

A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. If we assume investors are rational, a decrease in interest rates will prompt investors to move money away from the bond market to the equity market. At the same time, businesses will enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which, in turn, leads to higher stock prices. Investors and economists alike view lower interest rates as catalysts for expansion.


(Source: Investopedia)[/i]

OK.. investopedia explains it in a good way.. But can we really say the relationship with int rates and stock market performance is not related? Looking at how CSE operates?

We've seen at the pinnacle of int rates for FDs in 2011, stock market also made the peak and crashed. Those days, banks gave 20-25% FD rates for 2-5 years deposits. So cant blame ppl ig they wanted to move out from the market thinking that its too high...
It has come to this point at least now with 10-14% rates.. When FD rates are high, ppl diversify their portfolios to FDs cuz its a sure shot than market up-downs. But when the rates are low, they tend to take a small risk and trade/invest.

Then comes Antonym's enlightenment what a lower int. rates would do.. Yes, on the other hand, it invites ppl to spend more since what they gain from savings is peanuts.. But how other countries have survived? Imo, their rates are much lower 2-5%, even their lending rates are the same.

D.G,
We understand ur point too.. Its frustrating to see jokers around MR. But we cant change the system that's been there so easily.
What government institutions do every-time cannot be MR's decisions and I dont think even MR has a clue on what to do to make the economy grow.. Only the ppl who have some knowledge in this area would ask him to implement this and that.
But doing so, he also cannot make all ends equal squares, can he?

So, we, as educated, should look at these things in an non-political angle and see what positives to be expected than negatives..

Therefore, rather than blaming jokers who mislead MR, u can also add few points here rite? Ur matured, well educated, experienced in life. So you have a great and worthy cause to undertake here - enlighten the youngsters, share your experiences to educate them to be of worthy citizens in SL. in a non-political manner.. No MR, govt is needed for such rite?

Dear Smallville


I don't know how old are you but you seems like so matured as well as well educated.  I am proud of people like you.

Want to be shocked?? Here is a kicker.

General Saving account rate in USA for a whole year : hold on now , 0.01% ( yes 0.01% per annum)

FD rates ?? If you lucky you can get 0.2% per annum at regular stable bank

smallville wrote:

But how other countries have survived? Imo, their rates are much lower 2-5%, even their lending rates are the same.

Thank you  Smallville

I also try see stock market problems independently.That  is why i 
write against the govt interference to stock market



Politically i have been a supporter MR from 1970. I worked in Presidents office during the presidential election time.People who know me know about my political connections from university days in late 1960s

Most of young people do not know How read efectively
They understand what they assume

D.G.Dayaratne wrote:Thank you  Smallville

I also try see stock market problems independently.That  is why i 
write against the govt interference to stock market



Politically i have been a supporter MR from 1970. I worked in Presidents office during the presidential election time.People who know me know about my political connections from university days in late 1960s

Most of young people do not know How read efectively
They understand what they assume

Yes D.G.. This is why the country need people like you in proper places.. Its a shame that SL has somewhat lacking behind in that section.
And this is why the Forum also needs people in your caliber to educate the crowd.
If our people got a comprehension problem, if they dont know how to read between lines, then you're most welcome to share a bit from your knowledge and experience and educate them...

You've closely worked with MR, may have supported his campaigns and got so much experience how things are done in this country.

Apart from that, u may be a com. graduate, went to a village school and earned a name, came up big in life with your own courage and strength.
So DO I NEED to put an EFFORT to tell you that you've got a certain amount of respect from us?

I know that u've retired but what you can do may be amazing even at this age... I'm in no match for your age to advice you but what I ask u is - dont let the political views cloud your instincts and superb knowledge..
Let the politicos be themselves, let MR continue his plight, put aside his jokers... What we have here after that?
Our own D.G. Daya at his service?

Cool, aint it?  

Pathfinder Economic Flash

The Monetary Policy Committee’s 50 BP reduction in interest rates can be timely. It can boost growth without undermining stability provided there is sound fiscal/monetary policy harmonization and the pursuit of a flexible exchange rate policy.

The IMF and several other commentators have cautioned against an interest rate reduction at this point. They have been concerned that a more accommodating monetary policy could fuel inflation and undermine the balance of payments. In their view, demand management policies are not the appropriate option to stimulate the economy at this juncture. Indeed, the IMF, and others, have argued that the correct approach would be to give the economy a boost through structural reforms that strengthen the growth framework of the economy. This position would be valid if there was no output gap i.e. the economy was growing at or near its trend rate of growth.

However, if one examines proxy indicators such as government revenue (high dependence on indirect taxes on economic activity results in a strong correlation between growth and revenue); imports (there is a strong import co-efficient in Sri Lanka’s growth process); electricity sales; and cement sales (the construction sector has been a major source of growth), the balance of probability is that there is currently a significant output gap. Hence, there is space for prudent demand management policies which promote growth without undermining stability.

At this particular juncture, relaxation of monetary policy constitutes the best option to address the significant growth deficit. However, it should be supplemented by keeping the government’s announced fiscal consolidation trajectory on track. This should apply to the budget deficit, the losses of SOEs on the balance sheets of state banks and arrears. The adjustment of fuel and electricity prices has been a commendable advance in this respect. However, it is important that fiscal discipline is maintained to come close to achieving this year’s target of 5.8% of GDP for the budget deficit. At a time when there is a growth deficit, there is a case for loosening monetary policy to compensate for the tighter fiscal stance. However, if both fiscal and monetary policies are accommodating, overheating would be inevitable with adverse consequences for inflation and the balance of payments. There is, therefore, a high premium attached to the coordination of monetary and fiscal policies at this time.

A flexible exchange rate policy is also a necessary supporting measure for a more expansionary monetary policy. A key lesson from 2010/2011 is that monetary easing when combined with an overvalued Real Effective Exchange Rate (REER) creates incentives to borrow and import which are inimical to the stability of the balance of payments. Maintaining a stable external position is even more important in a context where Fed tapering is inevitable at some point.

It must be recognized that the economy cannot be placed on an accelerated growth trajectory of 8% on a sustained basis without structural reforms. However, there is a time asymmetry between the pain and gains associated with such reforms. Hence, it is unlikely that this will happen at this stage of the current political cycle. The challenge is to formulate a package of structural reforms that are implemented at the very beginning of the next political cycle. In the meantime, there seems to be space for some prudent demand management through lower interest rates to address the existing growth deficit.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=90256

Smallville

Thank you very much

Click here to watch the interview on Bloomberg with Sri Lanka Central Bank Governor on Policy, Economy