Sri Lanka's Flexible Inflation Targeting: Accountability in Action or Paper Promise?
As part of a recent coursework exercise analyzing inflation-targeting countries, I turned the lens on Sri Lanka's own monetary policy evolution. What started as a simple exercise revealed deeper questions about how well our Central Bank of Sri Lanka (CBSL) sticks to its targets and who holds them accountable when it doesn't. Sri Lanka rolled out an enhanced monetary policy framework in 2015, blending monetary targeting with flexible inflation targeting. This shifted decisively in 2023 when flexible inflation targeting (FIT) became the law via the Central Bank of Sri Lanka Act No. 16. The target? Keep headline inflation at 5%, with a flexible ±2% band, meaning it shouldn't dip below 3% or rise above 7%. From October 2023 onward, CBSL committed to this under the Monetary Policy Framework Agreement. Accountability kicks in through a clear legal mechanism. If the Colombo Consumer Price Index (CCPI) headline inflation, calculated as the three-month average for the quarter—breach...
