Sri Lanka’s top policymaker underscored the importance of clear and consistent communication in managing the public’s expectations about inflation.
Nandalal Weerasinghe, Senior Deputy Governor at the Central Bank of Sri Lanka, noted in a speech on Evolution of Monetary and Exchange Rate Policy in Sri Lanka and the Way Forward:
“… the intent of the Central Bank to maintain inflation at mid-single digit levels, which was made clear through action as well as through communication, enabled the Central Bank to change the mindset of the people that Sri Lanka is typically an economy with double digit inflation. The change in the mindset was visible in improving inflation expectations … Sri Lanka’s achievement of single digit inflation for 105 consecutive months had little to do with monetary aggregate targeting. Instead, it was a result of the Central Bank’s ability to anchor inflation expectations, by repeatedly emphasising its utmost desire to maintain inflation at mid-single digit levels.”
INCREASING POLICY TRANSPARENCY
The Central Bank’s plan to fully implement what it calls “flexible inflation targeting” by 2020 will require, as Weerasinghe put it, "increased efforts" to build all the necessary preconditions for success. Increasing transparency will be key in this regard:
A key advantage of inflation targeting is that it is easier for the general public to relate to. Since inflation is well understood by the public, the inflation forecast will serve as an ideal anchor and, with improved communication, will help bridge the information gap between the central bank and the public. Reference to such a straightforward target, rather than to an elusive monetary target, will ensure increased transparency and accountability while enabling the public to understand policy shortcomings.
EYEING INFLATION REPORT IN 2020
The next step in increasing the Central Bank's forecast transparency will be the publication of comprehensive Inflation Reports, expected by 2020:
“The Inflation Report will explain inflation developments, inflation expectations, projections for inflation and other key macroeconomic variables, the assumptions behind such projections, reasons for any deviation of actual inflation developments from targeted levels, and remedial actions to be taken in the case of deviations.”
I have advised Sri Lanka's central bank on policy communications and think that its experience, if successful in evolving into an inflation targeter in the coming years, may inform the initiatives of other developing countries' central banks which have been switching to more forward-looking policy frameworks.