ECONOMYNEXT – Sri Lanka’s consumer prices have risen for three straight months with the official index rising 1.0 percent during the month of June 2015, data from the state statistics office showed, as private and state credit picked up.
The Colombo Consumer Price Index rose 0.2 percent in April, 0.7 percent in May and 1.0 percent in June, with the index gaining 1.96 percent during the past quarter.
The annual gain in the index is still 0.1 percent (inflation so-defined) mostly due to sharp price drops in February and March made by a budget in January 29, which with tax cuts ultimately financed by credit as the state salary bill and studies went up.
In February the index dropped 2.3 percent and in March 0.4 percent.
Increased government and private borrowings were financed by excess liquidity in the banking system which analysts say naturally ended up in the balance of payments as there cannot be a sufficient domestic supply response when demand spikes suddenly.
A policy rate cut in April came in this backdrop. Before the tax cuts and fuel price cuts in January the index also rose for three straight months, growing 0.1 percent in November 2014, 0.6 percent in December and a sharp 1.7 percent in January 2015.
Though a steep rise in inflation need not necessarily continue with external inflationary conditions not so acute with less loose US policy driving the dollar up and pushing down commodity prices analysts say the situation bears watching as conditions look similar to early 2011.
The Central Bank cut is policy rate corridor from 7.25 – 9.0 percent to 7.0 -8.5 percent in January 2011, as fiscal policy deteriorated. The cut also came after the credit cycle turned positive and a drought pushed up energy costs.
The higher state costs were financed by credit helping generate a balance of payments crisis.
But now policy rates are at 6.0-7.50 percent as fiscal policy is deteriorating with higher subsidies.