Central Bank must ensure financial system stability - Governor

ADRESS: The Central Bank of Sri Lanka has defined its key objective, not simply as price stability but as economic and price stability, the Governor, Central Bank of Sri Lanka, Ajith Nivard Cabraal said.

He inaugurated the International Course on Central Banking, organised by the Center for Banking Studies (CBS) yesterday. “This is expected to prevent the Bank from trying to stabilise a price index rather than ensuring overall price stability in the economy.

“Though some Central Banks have delegated the bank supervision function to a separate agency, it is vital that financial system stability is also ensured. This is the other objective of the Central Bank of Sri Lanka,” he said.

He pointed out in the course of his address that the inter dependence of price stability and financial system stability should be well recognized. “It would not be possible for a central bank to use its instruments to ensure price stability without financial system stability as these instruments operate through a well functioning stable financial system.

Failing to restrain excessive credit expansion and maintain price stability will have a serious impact on maintaining financial system stability.

We should also be mindful of the fact that an attempt to ensure financial system stability through an injection of high-powered money could greatly endanger the achievement of price stability,” Governor explained.

Quoting the former Chairman of the Fed Reserve Bank of USA, the Governor said the truly unique power of a central bank is the power to create money, and ultimately the power to create is the power to destroy.

“Designers of central banks have well recognised the danger of this power.

They have ensured that this power be exercised diligently by assigning the responsibility of maintaining price stability to central banks,” he said.