The Central Bank also introduced a Monetary Policy Consultative Committee (MPCC) comprising academics, professionals and private sector representatives, enabling the Central Bank to obtain views of the private sector to be used in the monetary policy formulation process. In addition, the Central Bank started to enunciate its monetary  13  and financial policies for a medium-term horizon though a Road Map, which was unveiled at the beginning of each year. 105 Consecutive Months of Single Digit Inflation In spite of these modifications to the framework of conducting monetary policy over time, Sri Lanka continued to suffer from double digit inflation until 2009 as a combined outcome of high budget deficits and loose fiscal policy, reactive rather than proactive monetary policy, frequent domestic supply disruptions and international commodity price shocks. In June 2008, inflation increased to 28.2 per cent, the highest level of inflation since 1980s. In order to manage this situation within the monetary targeting framework, the Central Bank used strict quantitative monetary targets with increased policy interest rates while also imposing restrictions on access to the Central Bank reverse repurchase facility. In a display of validity of monetary targeting, the Central Bank was able to bring down inflation from the peak to near zero levels within a 12-month period. It was the sharpest disinflation the country has experienced in the history of Sri Lanka, but it must also be noted that the weak global commodity prices also contributed to this decline to some extent.
The monetary targets were then translated into a permissible level of credit to the private sector by commercial banks after allowing for the impact of the behaviour of the external sector and the credit requirements of the government.” This is a classic characterisation of an annual monetary programme, which is a crucial element in monetary aggregate targeting. Based on Irving Fisher’s Quantity Theory of Money, monetary aggregate targeting seeks to explain the relationship between money growth and nominal economic growth (which is the combination of real economic growth and inflation). In this framework, as monetary policy instruments attempt to influence the final objective of inflation by first affecting monetary aggregates, broad money supply was considered the intermediate target. For operational purposes, reserve money or base money, which could be influenced and monitored by the Central Bank on a daily basis, was considered the operating target. The operating target and the intermediate target, both being monetary aggregates, were linked to each other through the money multiplier. 9  An Evolving Exchange Rate System While monetary aggregate targeting remained the framework for the conduct of monetary policy in Sri Lanka, the exchange rate regime also underwent a gradual evolution. The managed floating exchange rate system broadly remained a crawling band arrangement as the margin associated with the foreign exchange transactions was increased from time to time.