May 13, 2012 (LBO) – Sri Lanka’s central bank is targeting average inflation to be around 6-7 percent and is expecting year end inflation at 7.0 percent or below Central Bank governor Nivard Cabraal said. While the so-called ‘annual average inflation’, is a number averaged over two years and is difficult for ordinary people to understand or calculate, the so-called point-to-point is a more transparent target to hold a central bank to.
Cabraal said year-end point to point inflation ‘would be around the same levels’.
In the 12-months to April 2012, inflation accelerated to 6.1 percent from 5.1 percent a month earlier.
A central bank, which has a legal money monopoly and is the only agency that can reduce the real value of its paper, can target and deliver any level of inflation measured by an index, including deflation, provided it is willing to back up its goal with appropriate policy in time.
In Sri Lanka’s case the island has pegged exchange rate and is exposed to rising dollar prices of traded commodities such as oil, due to loose US policy.
The only way to counteract loose US policy is to appreciate the domestic currency through tighter monetary policy.
But Sri Lanka’s c