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Sri Lanka Equity Forum » Stock Market & Forum Help » Stock Market News » Sri Lanka aims at inflation of 7.0-pct in 2013

Sri Lanka aims at inflation of 7.0-pct in 2013

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Director - Equity Analytics
Director - Equity Analytics
Jan 03, 2013 (LBO) - Sri Lanka's Central Bank aims to inflate the economy by about 7.0 percent in 2012 based on a monetary targeting framework where money supply and credit growth is taken into account.

Delivering a monetary policy roadmap for 2013 Governor Nivard Cabraal said the Central Bank was will continue to aim for mid single digits inflation over the medium term.

In 2012 the central bank's record of generating mid single digits inflation was thrown off track after tens of billions of rupees liquidity was injected into the banking system triggering a balance of payments crisis ending the year with 9.2 percent consumer inflation.

Under indicative targets unveiled on January 02, the Central Bank is aiming at inflation of 7.0 percent in 2013, moving down to 5.0 percent in 2015 measured by the gross domestic product deflator.

The GDP deflator, though confined to a calendar year, is calculated on a complex method compared to a price index and is available less frequently and with a greater lag and is therefore less transparent to those affected by the inflation that is generated by a central bank.

Central banks that are successful in generating low levels of inflation target a more transparent so-called 'headline' price index with minor changes, though monetary authorities that get countries into bigger trouble such as the Federal Reserve target a 'core' index.

Deputy Governor Nandalal Weerasinghe said the GDP deflator was a proxy for headline inflation and its use was not in any way a lessening of the commitment of the Central Bank to low inflation.

He said the difference between headline inflation and GDP deflator is likely to be less than one percent and in any case only a range can be targeted and not a specific level.

Last year Sri Lanka was targeting inflation of around 5 to 6 percent but missed it by a wide margin with year-end inflation ending at 9.2 percent after spiking as much as 9.5 percent.

Sri Lanka does not have an active inflation targeting framework where price levels are directly anchored to a consumer price index.

As late as last year, Central Bank Governor Nivard had more confidence in targeting inflation directly, saying that the monetary authority has put five years of work on improving its framework.

"The central bank can with greater confidence 'target' inflation in a more broader sense," last year's monetary policy road map said.

Sri Lanka's central bank has a strong record of creating high levels of inflation and balance of payments crises like her South Asian neighbors such as the Reserve Bank of India, especially after 1978 but its low inflation credentials have improved in recent years.

After independence from British rule, both India and Sri Lanka has generally followed the same types of policies and ended up with similar outcomes.

Governor Cabraal said the Central Bank had now kept inflation in 'single digits' for 47 months, the longest period in recent history, exceeding the 23 months of single digit inflation generated up to 2003 under then Governor A S Jayewardene.

This year the Central Bank is targeting broad money to at 15 percent up from a estimated 16.2 percent in 2012, reserve money (the monetary base through which all final transactions are cleared) to grow 14.5 percent from 10.2 percent.

Credit to private sector is targeted at 18.5 percent the same as in 2012.

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