CB expects improved policy decisions this year

The Central Bank says that it is better prepared to make informed policy decisions with the introduction of the New Colombo Consumers’ Price Index – CCPI (N), according to a top official.

“CCPI had severe weaknesses, including very old weights, non-addition of new items, being based on the consumption patterns of 1948, etc. etc. Hence, it was not an accurate indicator of inflation in the country that could be reliably used by policymakers,” Central Bank Governor Nivard Cabraal said, delivering the “Road Map: Monetary and Fiscal Sector Policies for 2008 and beyond” on Wednesday at the Central Bank.

He noted that the old CCPI, which was based on about 400 items only, recorded more instability than the CCPI(N) which is a more representative and accurate price index for the country.

However, according to senior bankers, without ‘accurate’ fiscal discipline the CCPI (N) will be just another figure. “There is clearly a gap between monetary policy and fiscal discipline and when you cannot reconcile the two you print money,” a senior banker said. He added that despite showing a certain position it all boils down to who uses it and who interprets it. “Whether it is a road map or a geographical map, the fundamental requirement is to be sound with fiscal discipline,” he noted.

Cabraal reiterated that the country is set to reach “historical” records at seven percent growth by end this year and said that sustaining price stability was considered as the ‘overriding challenge’.

“It is a serious challenge for any central bank to conduct its monetary programmes when the country’s inflation could be driven by external shocks,” he added.

Cabraal said that the conduct of a successful monetary policy, while facing a high budget deficit is a challenging task, as the borrowings by the government from the banking system to finance such deficit, often makes it highly difficult and complex to maintain the monetary expansion along a pre-determined, tight path. “Further, since government borrowings are less sensitive to interest rates, any favourable impact of tight monetary policy on private sector credit growth may also be offset by high government borrowings,” he add. He also said that the outstanding debt to GDP ratio is now on a declining path and that it is expected to have reached 85.5 percent by the end of 2007 as compared to 89.2 per cent as at the end of 2006. “This improvement indicates that we are gradually moving towards the levels as stipulated in the Fiscal Management (Responsibility) Act, for this indicator. Nevertheless, we need to appreciate that we have to work intensely towards maintaining these favourable trends in the medium term,” he said. Cabraal said that a further moderation of credit growth during the first half of 2008 is expected.

He noted that the impact of high oil prices on the macro-economic stability of the country was diverse and would widen the current account deficit through an increased import bill while adversely impacting on the exchange rate stability.