Inflation to remain at single digit

CB to adopt new policy:

Ramani KANGARAARACHCHI

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.

Governor 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.