Sri Lanka expects inflation at 4 to 5-pct in 2016

ECONOMYNEXT – Sri Lanka is expecting to generate inflation between 4 to 5 percent during 2016, Central Bank’s head of economic research as lagged effect of money supply expansion shows results, an official said.

"Though headline inflation has shown some deceleration in these months it will gradually increase to 4 – 5 percent towards the end of the year," the Central Bank’s head of economic research K M M Siriwardana said.

"Key observations made by the Central Bank is the excessive growth of broad money to 17.8, which has been fuelled by domestic credit."

Sri Lanka domestic credit as private loans recovered in the last quarter of 2014 and the government sent the budget off the rails in January 2015, and started to borrow heavily in domestic markets.

The central bank laid the ground work for currency collapse by cutting policy rates in April 2015 and then printed tens of billions or rupees by purchasing Treasury bills to finance the budget (monetize debt) pushing credit and demand up.

Despite currency defence, which mopped up excess liquidity, which would have sent interest rates up, the Central Bank continued to inject steady stream of liquidity to boost credit, broad money and bust the currency.

However due to a stronger dollar and falling commodity prices Sri Lanka’s inflation has been muted up to now despite the currency falling from 131 to 144 to the rupee so far this year.

The core inflation index which largely made up of non-traded items was up 4.6 percent compared to a headline inflation (with trade commodities) rose only 0.9 percent in January based on the Colombo Consumer Price Index, while a nation-wide index showed prices fall.

In February 2015, the price index fell sharply after a new administration from 183.2 to 178.9 points and the index had climbed back to 184.9 points by January. Due to the statistical effect wearing off in February, 12-month inflation could move above 3.0 percent again, analyst say.

In December the central bank belatedly raised interest rates by 50 basis points, brining policy rates back to levels seen before April 2015, but lower levels of liquidity from currency defence (despite new money printed) had made banks raised deposit rates by around 200 basis points.

Analysts have called for reform of the central bank to reduce its discretion generated currency collapses and high levels of inflation. Since the 2007 however the Central Bank had generated lower levels of inflation than in the past.

Venezuela’s Central Bank has generated over 180 percent inflation up to last month, as falling oil revenues triggered money printing and sterilized forex sales.