Central Bank to change the way it sets monetary policy

The Central Bank will change the manner in which it sets the future monetary policy as the monetary board until recently came under flack from many quarters for being reactive rather than being proactive in policy making. 

The new Central Bank Governor, Dr. Indrajit Coomaraswamy wants to bring the change into monetary policy setting forthwith. 

“In the Central Bank, we want to introduce a new way of doing things. We want to have a much more forward-looking monetary policy set within a medium-term framework,” he said. 
The change intended to be brought into the way the monetary policy is set could be in response to the previous claims that the Monetary Board, ‘does too little, too late’ and has in fact become a follower of the market rather than leading and giving direction to it. 
“One could argue, sometime in the past that we have tended be a bit behind the curve and we tended to react more slowly than would have been ideal,” remarked Dr. Coomaraswamy speaking at an event organized by the Institute of Certified Management Accountants of Sri Lanka, recently.

The new measure could be well received by everyone as a well-intended, medium-term monetary policy framework will generate the trust in the currency through maintaining an acceptable level of inflation and interest rates which will lead to price stability in the country.
This discipline was lacking in Sri Lanka’s management of monetary aggregates, since the Central Bank was established in the early 1950s as it gave the prerogative to the Central Bank to print money and create inflation to unsustainable levels, thereby making the country poor.     

Soon after he was appointed as the Governor in June, Dr. Coomaraswamy at his second Monetary Board meeting raised its key policy rates by 50 basis points to tame the inflation and the fast-growing private credit, and the results are gradually coming into play.   

This sent a strong indication to the markets that he is ready to take action should the situation demand, and he is free from political interference.  
“So, now we want to be more proactive to have a forward looking monetary policy set within a medium-term framework,” he further said. 
Sri Lanka’s Monetary Board for so many years has been practising accommodative monetary policies for too long, until it was too late to react busting the currency, creating balance of payment crises and hurting the economic growth.
Sri Lanka for decades ran high budget deficits, high inflation, high real interest rates and over-valued currency, making the country’s produce extremely uncompetitive in the 
global markets.