Sri Lanka cut rates despite rising inflation as food prices would fall: CB Governor

ECONOMYNEXT – Sri Lanka cut rates despite rising inflation because it was mainly ‘food inflation’ which would be temporary and rates were not falling fast enough, Central Bank Governor W D Lakshman said.

“The recent acceleration in inflation was a concern,” Lakshamn told reporters in Colombo after lowering the policy corridor to 6.50 – 7.50 8.00 from 7.00 – 8.00 percent.

“But there were signs that it would be temporary. It is due to food inflation rather than demand. Supply conditions are already improving.”

He said consumer inflation is expected to be 4 – 6 percent in 2020. Sri Lanka consumer prices in the capital Colombo rose to 4.8 percent in December from 4.4 percent in November with index gaining 0.5 percent in the month.

Lakshman said market rates were falling but not fast enough, prompting the cut.

Sri Lanka’s private credit is also picking up and economic activity is supported by stronger business confidence and policy measures, he said.

Head of economic research Chandranath Amarasekara said the the average weighted lending rates had fallen to around 12.5 percent and the central bank expected it to originally fall to 12.5 percent by March.

However it was felt that without a rate cut, the average lending rate would not fall.

Sri Lanka economic growth in 2020 would exceed 4.0 percent, he said helped by policy tax cuts, stronger business confidence. Sri Lanka’s growth fell in 2019 after the rupee collapsed in 2018 just as the credit system was recovering from 2016 collapse of the currency peg.

Data showed that private credit grew 58 billion rupees in December while central government and state enterprise borrowing also grew. (Colombo/Jan30/2020)