• Mid-corridor rate proposed as the key policy lever
• Move aims to improve monetary policy transmission and market expectations

The mid-corridor rate would be suited for the role of policy rate instead of a single policy rate as it would ensure liquidity developments, Bloomberg Economics said.

Accordingly, the International Monetary Fund (IMF) has recommended that the Central Bank should move to a single rate to improve transmission of monetary policy replacing the two policy rates.

There are two rates, the standing deposit facility rate (SDFR) - the minimum rates paid by the central bank for the absorption of overnight excess liquidity from the banking system - and the lending rate (SLFR) - the maximum rate charged by the central bank for the injection of overnight liquidity.

Together, they form the interest-rate corridor.

“The IMF’s recommendation does not mean that the two rates should be abolished. Instead, the IMF seeks to have the central bank introduce a new key policy lever within the corridor,” Bloomberg Economics said.

It said that policy rate will help the CBSL clearly communicate its monetary policy stance. That, in turn, will better anchor market expectations - improving the central bank’s ability to steer market rates toward a desired level.

Bloomberg Economics said that it’s standard practice to keep a symmetric corridor around the policy rate, and many central banks have adopted it.

Secondly, the average rate in the repo market currently stands at 8.72%, near the middle of the corridor.

Moreover, it said that the repo market has a higher transaction volume and more participants, including standalone primary dealers, than the call market,” it added.

Therefore, it probably is more representative of liquidity conditions than the call market, whose only participants are commercial banks.

“We think additional adjustments could be needed when the CBSL adopts the mid-corridor as the policy rate,” Bloomberg Economics said.

The call rate - the central bank’s current operating target - now stands at around 8.5%.

Further, it said that CBSL’s adoption of a policy rate at 8.75% could tighten liquidity in the market, which could see the call rate converge with the policy rate.