Sri Lanka to target inflation explicitly in 2012: CB Governor

Jan 04, 2012 (LBO) – Sri Lanka is moving to a more explicit inflation targeting environment setting a level of 5 to 6 percent for 2012 and priority has been shifted to maintaining prices over growth, Central Bank Governor Nivard Cabraal said. “Over the last five years we actively worked on those measures,” Cabraal said. “We have been able to deliver price stability over the past three years.

“That now gives us the confidence to say that move to a new level, that we can use these new strengths and therefore from the year 2012 onwards we will with greater confidence target inflation as well.”

So called fully fledged inflation targeting involves the commitment to target one anchor – an inflation index – and allowing the exchange rate to float.

As Sri Lanka has a dollar soft peg, the Central Bank will still be juggling with two anchors, a ‘domestic anchor’ in terms of the inflation index and an ‘external anchor’ in terms of the exchange rate.

“We will be looking at the exchange rate as a key stabilization factor,” Cabraal said.

Such dual anchor monetary regimes are prone to balance of payments crises, but countries have been able to keep inflation down by consistently having interest rates higher than the anchor US curren