CB to release medium-term inflation projections from this month

The Central Bank will release regular quarterly medium term inflation projections from this month so that businesses and other economic actors can make up their projections on prices and gauge the trajectory of future monetary policy actions much better than what speculation suggests.

Sri Lanka’s prices are expected to remain moderate through mid-2022 even amid the full effects of monetary policy actions take route into the real economy and even before seeing any sign of upward pressure stemming from the recovery in global commodity prices, including that of crude oil, the main commodity, which could bellwether the direction of the prices mostly.

Sri Lanka expects to maintain headline prices between 4 percent and 6 percent unless a sizeable supply shock could send it awry.

Sri Lanka sets interests rates using the future inflation expectations or targets, a monetary policy mechanism referred to as ‘inflation targeting’.

Economists have shown that the inflation targeting and the Modern Monetary Theory (MMT) are in conflict, as the Monetary Board cannot target inflation as money supply drives prices higher.

But some economists believe that when adequate safeguards are in place, it is less likely to cause runaway inflation in an economy.

Meanwhile, the government has hinted that the restrictions on non-essential imports, including personal vehicles, will be in place until the country re-builds its external buffers.

The medium term inflation projections by the Central Bank help the businesses to plan ahead of their pricing decisions and cost projections much closer to reality than doing their budgets in the dark.

This minimises the occurrence of shocks and surprises as it enables suppliers to be prepared while the policymakers to take action to prop-up supplies before the prices of certain commodities soar.