MONETABRIEF – Sri Lanka's central bank has called for public comments on its controversial target to raise cost of living by 5 to 7 percent a year, which critics had warned will lead to a second default as well as undermining democracy with monetary debasement.

Analysts have pointed out that the high inflation target as well as its operating framework in general has made the country vulnerable to external shocks, excessive credit growth and currency crisis.

Sri Lanka's rupee collapsed from 300 to 338 levels in the first quarter in the latest episode of external instability triggered by the 'flexible' exchange rate, which critics pointed out repeatedly allows the note-issue bank to engage in arbitrary conduct.

The central bank is heavily lobbying for a 5-7 percent inflation target despite so-called 'Groundhog Day' currency crises as the private credit recovers after rate cuts made on historical inflation or statistics (data driven monetary policy) rejecting classical economic theory (primarily Hume's price specie flow mechanism).

Analysts have warned that cutting rates on historical 12-month inflation statistics is a spurious doctrine, which is out of line with the note-issue banks monopoly to provide dollars for the Treasury to repay debt.

The central bank hiked rates in June to avoid forex trouble, showing that the source was domestic after claiming that the currency trouble was of external origin (the 'exogenous shock' narrative of macro-economists).

Sri Lanka now has a controversial Central Bank Act of 2023, which critics say incorporates the policy errors of the 2015-2019 period (rate cuts with inflationary open market operations and buy-sell swaps to fill potential output gaps which leads to currency crises and excessive foreign borrowings as long as rating space existed) which ultimately led to sovereign default and missed reserve target for March 2026.

"The CBA requires the inflation target and related parameters to be reviewed at least once every three years, or at shorter intervals under exceptional circumstances," the central bank said in a statement.

"Accordingly, the Central Bank of Sri Lanka is currently undertaking a review of the inflation target and related parameters to assess their continued appropriateness in the context of Sri Lanka's evolving economic environment.

"As part of this review, the Central Bank invites views from general public through this survey. The information collected will support the review process and contribute to ensuring that the monetary policy framework remains effective in maintaining price stability."

Google form to respond is here.

Responses have to be given by July 15.