Since the effects of monetary policy are exerted with a certain lag the Riksbank must adopt a forward-looking approach and base its interest rate decisions on a forecast of future developments. Before each decision, therefore, we prepare forecasts of factors such as inflation developments and the business cycle over the next two years. Since December 2000 we have often found reason to supplement the forecasts two years ahead with a qualitative assessment of the longer term. We have also worked with a simple policy rule: If inflation is forecast to be above target one to two years ahead we normally raise the repo rate, and vice versa if the forecast is below target. We haven't followed this rule mechanically, of course. That is exactly why the word ”normally” is always included  1  See Heikensten, L., “Behind the Riksbank’s massive walls – establishing the inflation targeting policy 1995-2003", Sveriges Riksbank Economic Review 3, 2003, 45–80, for a more in-depth account of the analytical framework for monetary policy and how it was developed up to 2003. BIS Review 11/2005  1  in the formulation of the policy rule. It is a rule that on average provides a good description of the Bank’s policy. The policy rule was introduced in 1997, primarily due to a desire to make policy even more transparent. The studies available at the time, all of which are uncertain, indicated that interest rate adjustments tended to have their largest impact on inflation in this time perspective.
The long run containment in inflation necessarily relies on containment of monetary expansion and increase in production in the country, particularly by improving productivity. As the Central Bank, what we can do? Obviously we cannot produce goods or services for the consumption of the economy, but certainly we can create the right conducive environment enabling the country’s economic performance. Why should the Central Bank be interested in productivity? Our role is to maintain economic and price stability and financial system stability. We also provide necessary payments and settlement infrastructure. We advise the government in economic affairs and policy making, and we provide important agency services such as exchange control, public debt management, provident fund management and regional development activity. In all these functions, our Mission is to “contribute to Sri Lanka’s prosperity”. At the same time, the Central Bank widely pronounces the theme of “success through productivity”. 4  BIS Review 116/2008  But, obviously this cannot be done by ourselves… The success through productivity needs a consolidated national effort. That is why we all have to push ourselves to a greater productivity level. We have to, •  work smarter,  •  combine better,  •  deliver results,  •  get it right. It should be noted that the private sector has continued to make commendable efforts in order to improve productivity in the country. What can the ICC Sri Lanka do? ICC Sri Lanka too can play a prominent and essential role.