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Wednesday May 19th, 2021
Economy

Sri Lanka inflation to spike before falling

ECONOMYNEXT – Sri Lanka’s inflation will spike in the coming months before falling next year, the central bank said as consumer prices in the 12-months to September rose to 5.0 percent.

The country-wide National Consumer Price also accelerated to 5.0 percent in September, broadly in line with the nation-wide index.

One of the reasons rates were not cut in October despite low growth was because of rising inflation, the Central Bank has said.

“The inflation rate is likely to go up towards the upper bound by inflation target of 4-6 percent,” Central Bank Governor Indrajit Coomaraswamy said after the last monetary policy meeting.

“Which means, we need to be cautious. Clearly an inflation targeting regime meeting the inflation target is the primary okay. So that’s ground for caution.”

“Secondly, from time to time, in recent week, there has been some pressure on the rupee. Clearly if it depreciates that also could put pressure on prices.”

Analysts who track the central bank closely have noted that monetary policy radically reversed from withdrawing liquidity from reserve money injections from a strong side convertibility undertaking up to July 2019, to actively printing money from domestic asset purchases in August.

Excess liquidity injections can make the rupee fall (and generate more inflation) regardless of the interest rate.

Because Sri Lanka is trying to collect forex reserves and injects base money through a strong side convertibility analysts point out that Sri Lanka is operating a peg.

After a period of excess liquidity or capital outflows, a weak side convertibility undertaking kicks in after a ‘disorderly fall’ of the rupee.

However there is no disorderly appreciation before the strong side convertibility undertaking kicks in either for current or capital transactions inflows, which tends to make the rupee extremely unstable and downwardly skewed even when private credit is weak. (Colobmbo/Oct21/2019)

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