CB shields ongoing DDO, directs banks to cut interest rates
The Central Bank (CB) vehemently shielded the ongoing domestic debt optimisation (DDO) strategy claiming that it was devised following important factors with necessary protective tools in an impartial manner with transparency, CB Governor Nandalal Weerasinghe told the Monetary Policy Review media conference on Thursday.
He noted that there was no need to panic on the superannuation funds value deviation under DDO as the Central Bank is taking all necessary measures to safeguard the hard earned money of private sector employees for their retirement age.
Answering a question raised by a journalist on a comment made by economist Dr. Nishan de Mel that DDO will result in a Rs. 12 trillion loss to the Employees Provident Fund (EPF) by cutting interest rates to 9.1 per cent from 13.52 per cent, Dr. Weerasinghe pointed out that this fact is highly misleading.
He categorically stated that the money given from EPF to the government is receiving 11.5 per cent interest at present but not 13.52 per cent. He emphasised that since the EPF holds T-Bonds until maturity, the net present value doesn’t arise. He also claimed that EPF would face a bigger damage if not included in DDO treatment.
“Preliminary forecasts revealed that opportunity loss of 4 per cent for EPF if it resorts to DDO treatment and 14 per cent tax if it begins paying higher tax,” Dr. Weerasinghe said, adding that the EPF is currently engaged in evaluating the proper impact.
The CB Governor said necessary action will be taken against banks if they fail to reduce interest rates following the reduction in policy interest rates by 2 per cent after reducing them by 2.5 per cent in June.
At present the policy interest rates remain at 11 per cent for deposit and 12 per cent for lending under the policy review.
He pointed out that EPF holds T-Bonds until maturity, and the net present value will not arise under DDO treatment.
Meanwhile the CB forecasts that inflation is likely to come down to a 7 per cent level in July 2023.
“The headline inflation is expected to decline further and stabilize around mid-single-digit level or the medium term, and in July, this month, we expect inflation to return to single-digit level, about 7 per cent level,” Director of Economic Research at CB Dr. P. K. G. Harishchandra told the media conference.
He noted that while disinflation continues, the core inflation for the month of June was reported at 9.8 per cent, which, for the first time in a few years, was below 10 per cent.
He further pointed out that this disinflation has been supported by all major categories, including food and energy inflation.
Comparing this outcome with the quarterly projection forecasted in April 2023, Dr. Harischandra highlighted that disinflation has occurred faster than initially expected over the last three months, mainly due to the falling food and energy inflation.
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