Sri Lankan Central Bank Governor Dr. P. Nandalal Weerasinghe said that governments and politicians may resort to money creation and keeping interest rates artificially low to achieve short-term growth, despite the consequences that may be faced in the long term, in his address at the 75th Central Bank anniversary speech on Friday (29).
“Famous researchers Kiddland and Prescott in their paper studies that governments and politicians may encourage short-term growth or elevate temporary rises in unemployment often by money creation or simply by keeping interest rates artificially low,” Weerasinghe said, emphasising that such measures are counter-active to long-term stability.
“Central Bank independence is beneficial to modern economies, backed by both theoretical approaches and practical case studies. I'll make some citations here. Jeremy Powell, the current Chair of the Fed Reserve, stated in 2024: ‘The record that Central Bank independence is a good institutional arrangement that serves the public well, is pretty clear’,” Governor Weerasinghe said.
US President Donald Trump intensified his criticism of US Fed Reserve Chair Powell and the Fed Reserve Board last week on Tuesday (26), threatening to replace board nominees with nominees of his own. Powell has received criticism by the head of state since the beginning of the year for not agreeing towards slashing of interest rates.
“Empirical evidence shows that Central Bank independence is associated with lower and more stable inflation, without the trade-off of long-term growth stagnation. During the last three decades in particular, it has been a strong trend towards enhancing Central Bank independence in both advanced and emerging economies,” Weerasinghe said.
He further added that independence allows Monetary Policy to be shaped to support long-term economic stability without being subject to short-term political pressures.
“This in turn leads to very high levels of inflation with eventual adverse consequences for people and of course the credibility of the central bank. The central bank is independent and has a clear mandate, which in most cases is aimed at maintaining price stability. It can help a central bank to stand against such temptations and act objectively on available data and pursue its long-term objectives.”
“This bill builds trust among markets and the public, helps contain costly pressures, prevents wage-price spirals, keeps inflation expectations well-managed and anchored, and makes production cost more predictable,” Weerasinghe said, referring to the Central Bank of Sri Lanka Act No. 16 of 2023.
“Therefore, setting the stage for being able to maintain economic stability with predictable economic policies, and thereby producing positive spillovers that ultimately improve overall public welfare.”