However, broad  policy analysis system, which brings  money (M2b) will remain as the key  together information and judgment in a  indicative intermediate variable, which  coherent and logical manner. reflects the broad liquidity conditions in the economy, to guide the conduct of monetary policy of the Central Bank. Under the FPAS, the Central Bank has already finalised the development of the baseline version of a semi-structural  To implement the new framework,  Quarterly Projection Model (QPM) for  macroeconomic projections, including  forecasting and analysing monetary  inflation projections, are currently being  policy. strengthened using short-term as well as medium-term structural forecasting tools and techniques. In this endeavour, continued efforts are being made to  Central Bank of Sri Lanka – ROAD MAP 2017  Meanwhile, the Central Bank is in the process of implementing several organisational changes necessary for the  13  effective implementation of the model. Moreover, we also intend to reintroduce  To this end, a separate Modelling and  the Monetary Policy Consultative  Forecasting Division has been setup in  Committee (MPCC) in 2017, comprising  the Economic Research Department and  eminent academics, professionals as  relevant processes are being developed  well as representatives from the private  while equipping the staff with adequate  sector. We expect to benefit from the  training. views and inputs of the MPCC in better  More importantly, we intend to introduce several changes in the  calibrating the monetary policy decision making process.
A series of home-made disasters have also rocked the sector. The UBS “rogue trader”, the losses at JP Morgan’s Chief Investment Office, LIBOR manipulation at Barclays (with others under investigation) and the mis-selling of PPI. These scandals have not so far been institution-threatening, but coming on top of the financial and macroeconomic crisis to date, they have helped to suck confidence from the financial sector just when it might otherwise have been recovering. Chart 3 shows a “heat map” of markets generated by colleagues in the Financial Stability area of the Bank. This chart uses indicators such as issuance amounts and bid-ask spreads to monitor market conditions. Red indicates a non-functioning market. The process of “healing” since 2008/09 that I referred to a year ago is clear. But then the improvement plateaus and starts to reverse in mid-2011. A year ago it looked like conditions were starting to revert to those of late 2008. As the managers of the UK’s foreign exchange reserves we experienced some of these deteriorating conditions at first hand. (It is a neglected point that the Bank of England is a significant participant in the market on behalf of HM Treasury through reserves management operations, as well as being the monetary authority for sterling markets.)