Flexible inflation targeting regime by 2020: CB

• To conduct monetary policy in proactive, forward-looking manner
• Stronger new Monetary Law Act to facilitate transition 
• FIT will end political influence on monetary policy decisions 

The Central Bank will transition towards a Flexible Inflation Targeting (FIT) framework by 2020 under a new Monetary Law Act, Central Bank Governor Dr. Indrajit Coomaraswamy said this week.

“The Central Bank is working towards implementing a FIT framework by 2020 to conduct monetary policy in a proactive and forward-looking manner,” he said during the Central Bank Road Map 2018.

He said that the policy target is to keep the price level of goods increasing by just 4-6 percent annually, which is desirable for a developing country such as Sri Lanka, with the stable price levels creating a better environment for growth and employment generation.

“We have now progressed into a time-bound plan to make this leap towards FIT a reality. The period starting from 2018 will be vital in laying out required reforms to facilitate a smooth transition to a FIT framework,” Dr. Coomaraswamy said.

The reforms required would be a strong Central Bank mandate and credibility built with a more powerful Monetary Law Act, effective monetary policy conduct for which the International Monetary Fund is providing technical assistance, and strong support from the government through fiscal policy commitment.

Dr. Coomaraswamy said that in the past, undisciplined fiscal policy had contributed most towards weak macroeconomic performance, and had restricted effective implementation of monetary policy, and that this government must now ensure its commitment to fiscal discipline is institutionalized.

Governments, including the incumbent, in the past have also used political influence to set monetary policy at less than optimal levels to achieve populist political targets. However, Dr. Coomaraswamy said that the current government has shown its commitment to FIT.

“It is encouraging that the government has already recognised the Central Bank’s move towards FIT as the future framework for monetary policy, in its policy document ‘Vision 2025- A Country Enriched’,” he added.

The governor also outlined plans for the Central Bank to conduct public outreach programmes to build awareness among the public on the FIT framework and to gain public support for the initiative.

President Maithripala Sirisena on Wednesday reading out the recommendations made by the commission appointed to probe the controversial bond issues in 2015 and 2016 said the government recommends adapting a new Monetary Law Act in order to avoid malpractices in the Central Bank.