He reports, and I quote: “Under the draft law, the Central Bank will be the principal monetary authority, but it is obvious that it cannot exercise its authority in the monetary field as in a water-tight compartment, from which the various ministries and other agencies of the Government, are excluded. There is no fine line separating monetary policy from other policies, such as fiscal and trade policies. The Minister of Finance through his fiscal policy, or the Minister of Commerce and Trade through his authority to control imports and exports, can exert a powerful influence upon monetary conditions in Ceylon. But it is the clear intent of the Bill to concentrate, in so far as it is considered practicable and constitutional to do, as much monetary authority and responsibility as possible in a single regulatory and operating agency – the Central Bank”. Third: The Monetary Law Act (Chapter 6) envisages the Central Bank acting as the Fiscal Agent, Banker and Financial Advisor to the Government. Sections 106, 113, and 114 set out clearly the Central Bank’s role in relation to the management of the public debt and the borrowings by the Government and any agencies of Government. Those Sections read as follows: “Section 106. (1) The Central Bank shall act as the fiscal agent and banker of the Government and of agencies or institutions acting on behalf of the Government, whether established by any written law or otherwise.” “Section 113.
Yet growth in new investment has been falling, and in the past year or so has turned negative. To me this suggests that even the rise in the profitability we’ve seen has not been enough to compensate for the increase in the risk premium that’s been occurring in the background. And if you take seriously the crude estimates we’ve just been through, you might expect that to have had a significant effect on productivity growth. A brief summary Let me try and sum up. Business investment fell in every quarter last year and surveys suggest the underlying trend is still negative. This is remarkable at a time when profits are high, when the economy’s not been in recession and when employment has been growing strongly. A plausible explanation is that rising uncertainty has acted like an extra hurdle on the required rate of return for new capital projects, deterring expansion in productive capacity and encouraging firms to meet new demand with labour instead. The economics tells us that, because such spending is costly to reverse, perceived downside risks to future profits can act as a powerful disincentive to  12  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  12  new investment projects. If something’s easier to get into than out of, you naturally worry about what might subsequently go wrong. Those perceptions may have been worsening for some time. The evidence suggests that we’ve been living with a high risk premium on new investment for several years.