ECONOMYNEXT – Sri Lanka’s central bank has bought 113 million US dollars from forex markets in December 2023, taking the total collected in the year to 1.895 billion US dollars, backed by deflationary policy, official data shows.
The central bank allowed rates to go up from April 2022, in the first step to correcting a balance of payments crisis, triggered by rates cuts enforced with aggressive open market operations involving multiple liquidity tools.
Rate cuts enforced with liquidity injections by a reserve collecting central bank trigger forex shortages, then a rapid loss of confidence as the so-called ‘flexible’ exchange rate regime flips and attempts to float (exchange rate as the first line of defence).
After a massive confidence shock is delivered including credit downgrades, steep rate hikes and an economic contraction to kill credit is needed to restore the confidence in the currency and stabilize the monetary system.
Sri Lanka’s monetary stability was restored around August/September 2023, and the central bank has been able to buy dollars and mop up the liquidity generated by dollar purchases.
In part, the exercise was helped by counterparty limits on bank access to central bank printed money through standing facilities.
- https://economynext.com/sri-lankas-central-bank-collects-us1-8bn-from-fx-markets-in-2023-150484/
The central bank allowed rates to go up from April 2022, in the first step to correcting a balance of payments crisis, triggered by rates cuts enforced with aggressive open market operations involving multiple liquidity tools.
Rate cuts enforced with liquidity injections by a reserve collecting central bank trigger forex shortages, then a rapid loss of confidence as the so-called ‘flexible’ exchange rate regime flips and attempts to float (exchange rate as the first line of defence).
After a massive confidence shock is delivered including credit downgrades, steep rate hikes and an economic contraction to kill credit is needed to restore the confidence in the currency and stabilize the monetary system.
Sri Lanka’s monetary stability was restored around August/September 2023, and the central bank has been able to buy dollars and mop up the liquidity generated by dollar purchases.
In part, the exercise was helped by counterparty limits on bank access to central bank printed money through standing facilities.
- https://economynext.com/sri-lankas-central-bank-collects-us1-8bn-from-fx-markets-in-2023-150484/
