ECONOMYNEXT – Sri Lanka’s inflation expectations are said to be “very high” though the price index has started to grow at a slower pace, former Central Bank Governor Indrajit Coomaraswamy said.
“The IMF says inflation expectations are very high, even though inflation is coming down,” Coomaraswamy told an investment forum organized by CT CLSA Securities, a Colombo-based brokerage.
Participants of the forum who are in the central bank’s expectations survey should not just fill the questionnaire routinely but give some thought before doing so, he said.
Sri Lanka’s inflation (the rate of price increases) has slowed and some traded goods prices have fallen absolutely after the central bank raised rates and curbed private credit which is also helping maintain an exchange rate peg around 363 to the US dollar.
The 12-month inflation shown by the widely watched Colombo Consumer Price Index peaked at 69.8 percent in September and the National Consumer Price Index peaked at 73.8 percent.
Interest rates are still less than half the inflation and administrative financial repression has been threatened.
Mainly non-traded services components of the index are still going up as relative prices adjust.
Modern central bankers believe that expectations contribute to inflation and/or make their job harder, though critics say it is yet another victim blaming ideology developed by Western Mercantilists to escape accountability after mis-targeting interest rates.
In the 1970s Great Inflation period US Presidents Nixon and Carter and their economic advisors in particular popularized several victim blaming ideologies including wage-price-spiral inflation (blame the unions), exogenous shocks (blame the OPEC cartel) as well as speculators, monopolists, among others, until Fed Governor Volcker came in and killed inflation with monetary tightening. (Blaming the Victims: The Government’s Theory of Inflation)
A central bank is the only agency that can create inflation or stop it.
The US Fed has also started to tighten monetary policy aggressively in 2022 putting the brakes on global commodity prices. The US Fed earlier blamed ‘supply chains’ as producers and shippers struggled to cope with the sudden demand exerted by stimulus checques and monetary easing. President Putin is still blamed.
In Sri Lanka banks who are reluctant to lend due to risk aversion have deposited over 300 billion rupees in the central bank (a form of private sector sterilization of non-borrowed reserves), preventing earlier printed money from going to the market and creating demand and forex shortages.
Banks which overtraded with central bank money are borrowing about 150 billion rupees overnight from the window. Earlier this month the central bank injected 130 billion rupees into the banking system permanently in a bid to lower interest rates.
The kerb market rate has also stabilized around 370-375 to the US dollar for the past two months helping anchor traded goods prices. (Colombo/Nov28/2022)