More dynamic approach to monetary management in 2011 – Cabraal

Central Bank to follow a dual approach of an economic analysis and a monetary analysis

Central Bank Governor Nivard Cabrall on Tuesday announced a more dynamic approach for monetary management in 2011 to better achieve macro-economic challenges in the country.

He said that at present monetary management in the country is essentially guided by the monetary targeting framework. For example Reserve money is the Operating Target and the Broad money is the Intermediate Target. Monetary programme serves as the guide to monetary policy operations in the country.

“However the vast structural changes now taking place in the economy could result in significant fluctuations in financial flows and changes in financial habits of people as well as changes in the velocity of money and money multiplier,” Governor Cabraal said during his presentation on the Central Bank’s Roadmap for 2011 and Beyond.

“In the face of such changes, it will be more challenging to stipulate exact targets for monetary aggregates. Hence the existing framework needs to be supplemented by a more dynamic approach if we are to secure a low and stable level of inflation in the years to come,” he emphasized. As per the Roadmap, a 5% inflation is targeted for 2011. Annual average inflation reached 5.9% in December 2010, up from a 25 year low of end-year annual average inflation of 3.4% in 2009.

Year-on-year inflation in December 2010 was 6.9% and the Core inflation was less volatile and declined to 6.3% on an annual average basis.

As part of this dynamic approach, Cabraal said the Central Bank will follow a dual approach -  an Economic Analysis and a Monetary Analysis.

According to him the economic analysis would cover Aggregate demand and potential output, Developments in the global economy, Fiscal developments, Exchange rate movements, External trade and the balance of payments, Developments in capital markets as well as other financial markets, and Labour market conditions.

For this analysis, the Governor said rebasing the Colombo Consumer Price Index (CCPI) on at least the “2006/07Household Income and Expenditure Survey” would be of vital importance.

In view of this a new CCPI based on 2006/7 survey will come into force and it would be a more  representative price index that reflects most recent changes in consumption patterns, the Governor said. It will also help formulation and conduct of monetary policy in addition to it being a realistic index to assess current inflationary pressures as well as inflationary outlook.

The other approach of monetary analysis would cover the impact of various domestic and international shocks on the economy, the sensitivity of the on-going Monetary programme to the above shocks and the need to adjust it in order to deliver the overall policy deliverables, possible changes in credit growth: Bank credit to the Government, Public Corporations and the Private sector, Money market liquidity and its control measures, Impact of capital inflows, its impact on the exchange rates and money markets, Savings and investment patterns, and Developments in the financial system. As per Central Bank’s projections the 2011 monetary program envisages a GDP growth of around 8.5%, a GDP deflator of 6%, a Balance of Payment surplus of around $ 350 million (as against $ 900 million in 2010), net credit to the Government to be around Rs. 42 billion, credit to private sector to grow by 16% and broad money and reserve money growth to be around 14.5%.

Governor Cabraal also said that implementation of monetary policy would see a multipronged approach with policy interest rates to be used as the key policy instrument and interest rate corridor approach to be continued. Additionally stability in call market rates to be maintained and policy advice and intervention methods in relation to the supply side will be offered to the relevant authorities. Furthermore exchange rate stability will be maintained, the Governor said.

Who will be consulted by Central Bank in 2011 for monetary policy?

Central Bank Governor Nivard Cabraal on Tuesday announced the new composition of the Consultative Committee on Monetary Policy.

The new Chairman of the Consultative Committee on Monetary Policy is former Ceylon Chamber of Commerce Chairman Mahen Dayananda and other members include Sohli Captain (Chairman, CEI Plastics Ltd.), Cubby Wijetunge (Director and Chairman Emeritus, Nestle Lanka Ltd.), Raja Senanayake (Chairman, SKM Holding Ltd.), Preethi Jayawardane, Jt. Managing Director, Chemanex Ltd.), Amal Cabraal, Chairman, Unilever, Sri Lanka), Nirmali Samaratunge, Co-Chairperson and Jt. Managing Director, Mackwoods Ltd. and Sujeewa Rajapakse, Vice President, Institute of Chartered Accountants of Sri Lanka).

The Monetary Policy Consultative Committee was announced in January 2007 in the “Road Map for Monetary and Financial Sector Policies for 2007 and Beyond”. The seven member committee consists of a cross section of stakeholders and academics so that the Bank could benefit by their expertise and experience in its monetary policy decision making process.