Sri Lanka inflation speeds up to 6.2-pct in February 2020 after rate cut

ECONOMYNEXT – Sri Lanka’s inflation accelerated to 6.2 percent for the 12-months to February 2020, from 5.7 percent in January as the credit system recovered from a currency collapse in and the central bank cut rates.

Food prices eased from unusual highs in January, but non-foods continued to edge up, date from the state statistics office showed.

The Colombo Consumer Price Index, the most widely watched indicator was flat at 134.6 points in February, with the food index up 0.2 percent and non-foods down 0.2 percent data from the state statistics office said.

Analysts had warned that inflation would pick as weak domestic demand from measures to pullout the country from a currency crisis in 2018 ended, and the price structure of the country adjusted to the fall in the rupee with a gradual recovery in credit and consumption.

The 6.2 percent inflation in February 2020, is the highest since the 7.1 percent seen in December 2018 when the country was recovering from a 2015/2016 currency collapse.

Sri Lanka’s food prices spiked unusually in over December and January, amid excess liquidity in money markets which drives demand and some disruptions in supply, mimicking conditions seen in January 2015, as the country recovered from a currency collapse in 2018.

Some vegetable prices started to ease in February.

Sri Lanka’s central bank cut policy rates in January, despite a pick-up expected in private credit and the budget deficit set to expand to 7.5-7.9 percent in 2020, after value added tax was slashed in January to give effect to an election promise and inflation was spiking.

However unlike in 2015 and 2018, when rates were cut while money was being printed to enforce the earlier rate, no large liquidity injections were being made in January.

The central bank said at the time that rates were cut expecting inflation to ease later.

Under Sri Lanka’s so-called ‘flexible’ inflation targeting, operated with a soft-peg, rates can be cut when inflation is going up or down.

However involuntary hikes then follow after liquidity injections trigger a currency crisis or a so-called skewed DCM (disorderly market conditions rule, where the peg is left undefended after liquidity injections) triggers panic undermining the credibility of the soft-peg. (Colombo/Mar01/2020)