Sri Lanka’s interest rates have been abnormally high for ages. This is not because of want of trying by the Central Bank, the sole reason for this disparity was our monopolistic banking market.
More than half the market is controlled by state banks. So when the central bank cut its rates a few months ago, these banks simply colluded amongst themselves and refused to reduce their rates, effectively setting the market standard which private banks weren’t going to go against.
Our rates of inflation, however dubious, appear to be falling down. This of course does not signify goods becoming cheaper; it only tells us that they are getting expensive at a lesser pace. The economy is slowing down and now the government has decided to enforce its monetary policy through giving a directive to state banks to cut the crap and get on with it.
In a less skewed market, we may have seen a more gradual and comfortable decline in rates. Instead, because of our badly managed state sector banks and lack of governmental foresight, this sudden need to cut the floor beneath the feet of the interest rate has arisen.
A drastic reduction in rates will not harm anyone except the people who depend on interest income. They should have been prepared for such an eventuality ever since the central bank cut its rates several months ago. There really is no point blaming the government if you can’t understand that the rates going down was inevitable given the current policy stance and market dynamics. But I guess you can’t assume your average Jayasinghe is always a savvy investor, even in the most plainly obvious areas.
So what you can blame the government is for its usual last-minute-drastic-action oriented approach. There is absolutely no reason why they couldn’t have imposed a gradual reduction of state bank interest rates before; thereby ensuring the public got the right signals in time to re invest their funds as they saw fit.
Meanwhile, everyone who is not a dependant on interest income is happy. The stock market will rise again because companies can now borrow more to invest in their businesses, the people are happy now that they can get cheaper loans to buy their houses, cars and fund extravagant lifestyles shamelessly beyond their needs. The government will be happy because money will start flowing through and savings will be cut down. Spending will rise and GDP will improve. The people who lost interest income need simply to reinvest in the stock market. And then we’ll have a happy cycle where everybody gets rich.
Sounds too good to be true? Well that’s cause it is. Monetary policy is just a temporary boost to the economy. As spending rises, so will inflation and consequentially interest rates as well. Yes, it is a somewhat of a self defeating cycle; but what it does do is give that electric burst of energy to the heart of the economy that gets it pumping again. And, like every heart in cardiac arrest, the shock treatment is to help it start beating happily on its own again.