Should the central bank be allowed to continue performing two conflicting roles of setting the inflation target and measuring changes in consumer prices as well?
This question has been raised by some policymakers and economists. Many have started saying the inflation figure released by Nepal Rastra Bank (NRB) every month does not reflect the market reality.
Currently, NRB, the central bank, fixes the annual inflation target and conducts study every month itself to check whether prices of various goods in its consumer basket ranging from cereal grains and vegetables to clothes and furniture have risen or fallen.
For instance, NRB, last fiscal, initially fixed the annual inflation target at eight per cent, which was revised to 8.5 per cent in the middle of the year. At the end of the year, it finally stated that the actual annual inflation rate stood at 9.1 per cent.
This dual role, many say, is tantamount to allowing a single body to press charges against a person and letting it issue the verdict on whether the defendant is guilty. This, they say, tends to create conflict of interest because it provides leeway to the central bank to ‘manipulate data to show it has met the target’.
“During foreign trips, many raise their eyebrows when we say the central bank is also responsible for gauging inflation, as most countries entrust that responsibility to another body to ensure transparency,” a high-ranking official told THT on condition of anonymity.
In the US, for instance, the inflation target is set by the Federal Reserve, the central bank, whereas the responsibility of gauging inflation rests upon the Bureau of Labour Statistics. Many other countries follow similar practice.
“It would definitely be better if we could embrace the global best practice, as it would clear up doubts regarding data manipulation,” Senior Economist Bishwamber Pyakurel, a former NRB board member, said. He, nonetheless, added: “Given the methodology used by the central bank to gauge inflation, there is very little room for scepticism.”
Inflation rate is considered a key economic indicator, as it provides the basis for framing the monetary policy and ensuring price stability.
High inflation rate generally denotes faster erosion in the value of money. For instance, annual inflation of, say, nine per cent would mean that a good that used to cost, Rs 100 a year ago, would now costs Rs 109 — indicating nine per cent depreciation in value of money in real terms.
Because of this reason, the central bank always tries to contain inflation at a certain level by controlling money supply.
source: RUPAK D SHARMA, The himalayan times,12 oct 2014
LINK
This question has been raised by some policymakers and economists. Many have started saying the inflation figure released by Nepal Rastra Bank (NRB) every month does not reflect the market reality.
Currently, NRB, the central bank, fixes the annual inflation target and conducts study every month itself to check whether prices of various goods in its consumer basket ranging from cereal grains and vegetables to clothes and furniture have risen or fallen.
For instance, NRB, last fiscal, initially fixed the annual inflation target at eight per cent, which was revised to 8.5 per cent in the middle of the year. At the end of the year, it finally stated that the actual annual inflation rate stood at 9.1 per cent.
This dual role, many say, is tantamount to allowing a single body to press charges against a person and letting it issue the verdict on whether the defendant is guilty. This, they say, tends to create conflict of interest because it provides leeway to the central bank to ‘manipulate data to show it has met the target’.
“During foreign trips, many raise their eyebrows when we say the central bank is also responsible for gauging inflation, as most countries entrust that responsibility to another body to ensure transparency,” a high-ranking official told THT on condition of anonymity.
In the US, for instance, the inflation target is set by the Federal Reserve, the central bank, whereas the responsibility of gauging inflation rests upon the Bureau of Labour Statistics. Many other countries follow similar practice.
“It would definitely be better if we could embrace the global best practice, as it would clear up doubts regarding data manipulation,” Senior Economist Bishwamber Pyakurel, a former NRB board member, said. He, nonetheless, added: “Given the methodology used by the central bank to gauge inflation, there is very little room for scepticism.”
Inflation rate is considered a key economic indicator, as it provides the basis for framing the monetary policy and ensuring price stability.
High inflation rate generally denotes faster erosion in the value of money. For instance, annual inflation of, say, nine per cent would mean that a good that used to cost, Rs 100 a year ago, would now costs Rs 109 — indicating nine per cent depreciation in value of money in real terms.
Because of this reason, the central bank always tries to contain inflation at a certain level by controlling money supply.
source: RUPAK D SHARMA, The himalayan times,12 oct 2014
LINK
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