Sunil Mendis: Creating a challenging and stimulating work environment New Year Message 2005 by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, to all employees of the Central Bank of Sri Lanka, Colombo, 1 January 2005. *  *  *  I issue this traditional New Year message at a time when the whole of Sri Lanka has been engulfed by a national tragedy caused by “tsunamis” that hit the country on 26th December, 2004. I take this opportunity to express our deepest condolence to the members of the families of bank employees who have lost their lives and to our employees and their loved ones who have suffered by this calamity. At the same time, I wish to share the sorrows of those employees who have lost their property. Words are insufficient but hope that they would move forward from this tragedy. With the magnitude of the disaster, there is no question that our nation needs to be rebuilt. Hence, as employees of a state organization which is at the apex of the country’s financial system, we have an invaluable task to perform. In this context, I place my message before you with the plea that we take part in the nation-building task by offering our maximum efforts. I have been greatly encouraged by the positive response which all the employees have demonstrated towards the provision of relief to victims and rebuilding of the nation.
Applying our present scheme, monetary policy, coupled with a fiscal policy based on a structural balance sheet, has achieved its inflation objectives by dampening external and domestic shocks more strongly. The turbulences that in the past caused recessions in Chile, today are manifested only as changes in the pace of growth. To this end, monetary policy operates through several channels. Primarily, it regulates market liquidity and it sets, through open market operations, an interest rate for the provision of liquidity to the financial system at very short terms. By way of these two mechanisms it affects market interest rates, which are the ones that influence asset prices and economic agents’ decisions. The effectiveness of monetary policy therefore depends on the operation of these mechanisms at different levels. First, the Bank's ability to ensure the provision of liquidity is critical, as it maintains market interest rates aligned with the MPR. This is done regularly through open market operations and the Bank itself operates systems that allow these operations to be carried out with the appropriate standards. There may be cases where there is a sudden rise in market rates, because players in the system are faced with potential or actual liquidity constraints. Such a situation occurred in 2008, when events associated with the collapse of Lehman Brothers swept over the world economy. On that occasion, the Bank announced to the market that it would resort to exceptional liquidity provision mechanisms in pesos and dollars, which allowed local rates not to be altered, despite severe external risks.