Central Bank denies reports of extensive money printing
View(s):“It is important to clarify that these claims are not accurate and are baseless. The liquidity (money) injected through OMOs is a routine central banking function aimed at managing adequate liquidity in the banking system for the purpose of stabilising the short-term interest rates in the economy and ensuring price stability, and hence it should not be grossly misinterpreted as “money printing”, the banking regulator said in a media release.
It said “money printing” generally means issuing new money to the economy and in economic terms, new money issued by a central bank is known as ‘reserve money’ or ‘base money’.
Reserve money is also called the ‘monetary base’ of the country (or high-powered money), as the commercial banks can create more money based on the money issued by the central bank. Reserve money is also treated as the monetary liabilities of a central bank and this is reflected in the liability side of the central bank balance sheet, which includes total currency issued by the central bank and the commercial banks’ deposits with the central bank. During 2024, reserve money issued by the CB has only increased by about Rs. 147 billion, which is an adequate amount to facilitate transactions in the economy. During 2024, reserve money increase was an outcome of significant purchases of foreign currency by the CB, while there has been a reduction in the stock of government securities held by the CB.
One of the determining factors of new money issued to the economy by the CB in the past was purchasing Treasury bills by the CB directly from the primary market. However, with the introduction of the Central Bank of Sri Lanka Act, No. 16 of 2023, which came into effect in September 2023, the CB is now prohibited from printing money through the purchase of government securities in the primary market to fund the government.
The main objective of the CB is to maintain domestic price stability, which means keeping inflation low and stable. Monetary policy, which is the strategy that a central bank manages interest rates and the money supply, is used to maintain price stability. The OMOs are a key instrument of monetary policy of a central bank. Currently, the CB relies on market-based policy instruments to implement monetary policy effectively, and hence one of the primary tools used in this process is the OMOs.
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