Inflation to remain at single digit
CB to adopt new policy:
The inflation level in the country was contained at mid single digit
levels in 2011 and it is expected to be 5 to 6 percent for 2012, Central
Bank Governor Ajith Nivard Cabraal said.
Ajith Nivard Cabraal
Elaborating CB plans for the forthcoming period in Colombo on
Wednesday, he said the annual average inflation was 6.7 percent in
December and year on year inflation declined to 4.9 percent from 6.8
percent at the end of December 2010 and the year on year core inflation
was less volatile recording 4.7 percent in December 2011.
The Central Bank has greater confidence in its ability to face new
challenges and adopt new frameworks of monetary policy as it could use
new strengths from 2012.
Cabraal said the Central Bank has carefully prepared to move to a
more advanced monetary policy framework from the traditional one since
early 1980s and since early 2000 it has acknowledged that a new
framework may be needed for more effective monetary management with
financial market developments and innovations as well as the structural
changes taking place in the economy.
The Central Bank cautioned that without such changes the efficacy of
the monetary targeting framework could diminish. Towards that end, the
CB identified measures needed to move to a better monetary policy
framework in the medium term.
The Governor said that almost 10 years ago the CB articulated
pre-conditions for moving to a framework targeting of inflation.
Accordingly, the budget deficit was reduced to a reasonable and
predictable level to reduce inflationary impact of budgetary financing.
Using a more representative price index to better reflect consumer
behaviour, having a measure of core inflation to identify demand driven
inflationary pressures also are other pre conditions.
To ensure the accountability of the monetary authority to deliver low
and stable inflation, the CB improved inflation forecasting and
identified inflation expectations strengthening monetary policy
transmission and improving transparency of monetary policy and policy
communication, he said.
The Governor said many of those pre conditions have now been achieved
and within the next few years inflation will be brought down to below 5
percent as inflation forecasting techniques have been improved.
The improved roads, transportation, electricity, village based
agricultural projects telecommunication, banking facilities and
financial inclusions are some of the other achievements which reduced
volatility in supply driven inflation through structural interventions
in the economy.
The communication and transparency of monetary policy was improved
through road map, strategic planning, advance release calendar, detailed
policy statements and daily updated website.
“The price stability delivered through inflation at single digit
levels for the past three years was a result of inflation expectations
surveys conducted to capture expectations of various stakeholders on
future inflation,” he said.