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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Surprise Rate Cut another benefit to 'Bond Manipulating' Arjun Aloysius and Arjun Mahendran fame - Opposition and Sri Lankans should ask for Central Banking Mahendran Manipulator to quit - Analysts

Surprise Rate Cut another benefit to 'Bond Manipulating' Arjun Aloysius and Arjun Mahendran fame - Opposition and Sri Lankans should ask for Central Banking Mahendran Manipulator to quit - Analysts

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StockGuru

StockGuru
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

Central Bank decision gives overnight capital gains worth millions to those who invested in the controversial 30 year Treasury Bond auction
Sri Lanka’s independent research analysts last week termed the decision by the Central Bank Monetary Board to cut policy interest rates by 50 basis points as a surprise given that there wasn’t such a requirement, as private sector credit growth had been recovering steadily in the midst of a low inflationary environment.

Their observations came in the wake of Central Bank announcing that headline inflation, on a year-on-year (y-o-y) basis, declined to 0.1% in March 2015 from 0.6% in February 2015 whilst private sector credit growth also rose to 12.6% (y-o-y) or Rs. 24.5 billion in absolute terms in February 2015.

The Central Bank in their latest Monetary Policy Review however said the current behavior of market interest rates is viewed to be inconsistent with the continued low inflation and investments needed to address concerns on economic growth for the year.
“The main catalyst that triggered the interest rate to spike was that controversial 30 year bond auction on February 27, 2015. However, since then people have been adjusting to the trend (of higher interest rates) as indicated by the gradual picking up of aggregate demand. So since the economy is heading in the right direction one sees no real need to cut policy rates at this time,” an analyst who did not wish to be quoted said.

“But as Central Bank said, if the decision to reduce rates is to boost economic growth (where we don’t have still published numbers for first quarter growth as yet), one must understand that lowering interest rates alone wouldn’t do that as factors such as policy consistency and delivering political certainty is what attracts investments. So by reducing rates now, the Central Bank’s thinking seems to be aimed at fulfilling aspirations of the short term rather than the longer term which is not a healthy phenomenon,” the analyst added.

The analyst further alleged that with elections round the corner, the Central Bank’s decision to cut rates may have been targeted at spurring the performance of the stock market and the bond market in the short term and helping the government to present a rosy picture of the economy in its election campaigns.

“If that was the case, that is to fulfill short term gains then it is even more shocking as everyone expected a change from this government from the last where the role of the Central Bank was expected to now be independent and apolitical,” the analyst said.
Meanwhile, another analyst The Nation Gain spoke to pointed out that following the reduction of the policy rates, there has been ‘big winners’ in the bond market front especially those who had bought long term treasury bonds recently.

“The reduction has given them (including the Central Bank Governor’s son-in law connected firm, Perpetual Treasuries which is currently under investigation for insider-trading) windfall profits or a nice capital gain as the government has guaranteed them a higher interest rate for their investment,” the analyst said pointing out the seriousness of the issue.

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank were reduced to 6.00 per cent and 7.50 per cent, respectively, with effect April 15, 2015. The Central Bank has also added that there is a further leeway to continue relaxation of monetary policy, primarily through a reduction in policy interest rates of the Central Bank to encourage economic activities by enhanced credit flows and investments due to lower cost of funds and behavior of market interest rates consistent with economic growth outlook.

“The monetary policy tool primarily adopted by the Monetary Board will continue to be the policy interest rates announced to the market with the support of other monetary policy tools. The relaxed monetary policy stance will also be pursued in months to come until concerns over inconsistent behavior of market interest rates are addressed sufficiently to facilitate the economic growth further in a low single digit inflation environment,” the Central Bank has noted.
- See more at: http://www.nation.lk/edition/business-tbl/item/40048-analysts-slam#sthash.WUVa5ZeF.dpuf

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