CBSL Governor urges new policies to counter inflation, geopolitical, and climate pressures

Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe called for a fundamental shift in central banking frameworks to address the mounting challenges of inflation, geopolitical fragmentation, and climate change, emphasising the importance of adaptable, evidence-based policies in today’s volatile economic environment.

Dr. Weerasinghe noted that while inflation has eased globally, central banks can no longer rely solely on traditional approaches due to the increasing frequency and intensity of supply-side shocks.

“Supply shocks emanating from geopolitical tensions and climate change vulnerabilities are becoming more frequent, warranting central banks to integrate such risks into their macroeconomic modelling and policy formulation,” he said addressing the 13th Annual International Research Conference in Central Bank of Sri Lanka on Friday. 

These disruptions, he added, complicate the task of forecasting inflation and formulating monetary policy.

Dr. Weerasinghe also cautioned that the trend toward global economic fragmentation poses a threat to price stability and growth. 

“A less integrated global economy is more prone to economic shocks and is exposed to higher inflationary pressures, posing challenges to central banks in maintaining price and macroeconomic stability.” 

Dr. Weerasinghe attributed this fragmentation to escalating geopolitical conflicts, including the Russia-Ukraine war and the Israel-Hamas conflict, which have led to trade barriers and the rise of trade blocs. On climate change, he pointed out the growing expectation for central banks to factor in environmental risks, despite it not being a traditional mandate. According to Sri Lanka’s Central Bank chief, it is not surprising that the central banks are called on to address climate change issues, although central banks may not have a sustainability mandate.

He noted that climate-related disasters have a direct impact on macroeconomic and financial stability, making it necessary for central banks to consider these risks in their policies.

Further, touching on AI, he noted that Central Banks have little or no choice but to leverage on these technologies to build new capacities and re-engineer their operations and work procedures.