Central Bank’s Roadmap 2018: A strategy to escape the 'high inflation-low growth trap’



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Central Bank announces its Roadmap- 2018 for all stakeholders that work with and come under the purview of the Bank. From left: Deputy Governor K.D. Ranasinghe, Senior Deputy Governor Dr. Nandalal Weerasinghe, Governor Dr. Indrajit Coomaraswamy and Deputy Governor C.J.P. Siriwardena. Pic - Nishan S. Priyantha


by Sanath Nanayakkare


The Central Bank of Sri Lanka (CBSL) yesterday announced its Road Map-2018, aimed at one main objective: to escape the 'high inflation-low growth trap' the country is in right now.


CBSL Governor Dr. Indrajit Coomaraswamy speaking on this important date on the calendar of the Central Bank pointed out that the Bank's motivation towards adopting 'inflation targeting as the monetary policy framework' has been long felt as an answer to the persistent occurrence of high inflation and low growth.


"In fact, we had recognized it as the most appropriate way to escape from this trap a number of years ago. The weakened relationship between money and inflation and deepening financial markets have been among the major factors that encouraged us to introduce the effective Flexible Inflation targeting (FIT) framework," he said.


"The Central Bank is entrusted with the task of maintaining price stability through the conduct of monetary policy. Based on the current monetary policy framework, we have been able to maintain inflation in single digits for close to a decade. Going forward, the introduction of FIT framework will improve our capacity to deliver price stability. This will provide a more propitious environment for growth and employment generation".


"Under the proposed FIT framework , the Central Bank will aim to preserve price stability of the economy by targeting an inflation range of 4-6 per cent. We believe that this target range is desirable for a country like ours in view of the vulnerability of the economy to supply and external shocks. We will employ market-based instruments, particularly the policy interest rates and open market operations (OMO) of the Central Bank , to influence market conditions and to navigate inflation in the targeted mid-single digit range. We have now progressed into a time-bound plan to leap towards an FIT reality. The period starting from 2018 will be vital in laying out required reforms to facilitate a smooth transition to an FIT framework," the Governor said.


He noted that the CBSL has identified three important pillars as the building blocks for adopting an FIT programme. 1. A strong CBSL mandate and credibility 2. Effective monetary policy conduct 3. Strong fiscal policy support and commitment.


Dr. Coomaraswamy hopes that the CBSL will receive a strong mandate to achieve this objective along with continued fiscal discipline from the government despite the fact that the country is getting into its next election cycle.


 
 
 
 
 
 
 
 
 
 
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