By The Pulseline News Desk
Sri Lanka will retain its 5% inflation target for the next three years, with the Government and the Central Bank of Sri Lanka (CBSL) formally agreeing to maintain quarterly headline inflation at the target through October 2029.
The new Monetary Policy Framework Agreement (MPFA) was signed on Thursday (1) by President Anura Kumara Dissanayake, in his capacity as Minister of Finance, and CBSL Governor Nandalal Weerasinghe, CBSL has said in a statement.
Under the agreement, CBSL is required to aim for quarterly headline inflation of 5%, with a tolerance band of plus or minus two percentage points. This effectively places the operational range between 3% and 7%.
The new framework comes as inflation has moved back towards the upper end of the permitted range, with CBSL attributing the recent deviation to higher energy prices following the escalation of the conflict in the Middle East.
The framework is being renewed under the Central Bank of Sri Lanka Act, which requires the inflation target and related parameters to be reviewed every three years, or earlier if exceptional circumstances warrant.
According to the CBSL, the latest review involved a technical assessment covering Sri Lanka’s economic structure, historical and empirical evidence, monetary policy considerations, the credibility of the inflation-targeting framework, stakeholder views and international experience.
Following the assessment, CBSL has submitted its recommendation to the Ministry of Finance, which accepted the proposed framework.
Debate over the 5% target
The decision to retain the 5% target comes amid an ongoing debate over what constitutes an appropriate inflation objective for Sri Lanka.
Critics of the existing framework have argued that the target should be lowered to 2%, bringing it closer to the inflation objectives adopted by a number of advanced economies.
CBSL, however, has maintained that setting the target substantially lower could have implications for economic growth.
The issue reflects a broader policy trade-off: while lower and more stable inflation can protect household purchasing power and provide greater price certainty, an inflation target that is set too low can constrain monetary policy flexibility and potentially affect economic activity.
For Sri Lanka, which is still recovering from its worst economic crisis in decades, the choice of target also comes against the backdrop of efforts to restore macroeconomic stability while supporting a sustained recovery in output and investment.
The 5% framework therefore gives CBSL a clear medium-term price stability objective while allowing inflation to fluctuate within a 3%-7% band in response to temporary shocks.
The Central Bank’s task will now be to keep inflation expectations anchored around the target while responding to supply-side pressures, including movements in global energy prices, without unnecessarily undermining economic activity.
The new agreement will remain in force for the next three years, unless the target or related parameters are reviewed earlier under the provisions of the Central Bank Act.
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