ECONOMYNEXT – Sri Lanka’s nation-wide inflation in the past 12-months measured by the National Consumer Price Index rose 6.1 percent, with prices jumping 1.5 percent during the month, data from the state statistics office said.
The National Consumer Price Index rose to 145.7 points in June from 143.6 points in June 2021 on top of a 1 percent rise in May 2021.
Food prices, among commodities that rise fastest in response to monetary policy were up 9.8 percent from a year earlier.
The NCPI was also 6.1 percent in May. The NCPI exceeded Sri Lanka’s ceiling policy rate of 5.5 percent at which money is supposed to be printed in April 2021.
In practice money is printed at around a 5.2 percent where a ceiling rate has been place for Treasury bills and it now serves as a de facto policy rate to monetize debt and inject liquidity in so-called Modern Monetary Theory.
Sri Lanka is rapidly losing foreign reserves as the liquidity is redeemed against a peg in partial convertibility.
Sri Lanka has in the past delayed rate hikes saying inflation was too low, or that food price rises are due to ‘supply constraints’ and triggered currency crises.
Sri Lanka’s rupee is loosely pegged to the US dollar and commodity prices pushed up by the Federal Reserve seep into the country through traded export prices and also imports.
The US fired ‘Powell bubble’ has been pushing up oil and other commodities around the world.
US inflation was 5.4 percent in June. But Fed chief Jerome Powell has said the inflation is ‘transitory’ and is continuing to print 140 billion dollars a month.
Classical economists had been warning from late last year that the US credit system has strongly recovered and inflation was going to exceed Fed targets. Some went so far as to suggest that Powell was delusional.
The US Fed has done the most damaged to the world among major central banks triggering the Great Depression after the ‘roaring 20s bubble’ after accidentally discovering open market operations, ending the centuries old gold standards in 1971 by trying to target and output gap.
In 2008/9 the Fed fired a massive housing and commodity bubble by delaying rate hikes and created a financial panic that is now known as the ‘Great Recession’.
Sri Lanka’s central bank also has a history of delaying rate hikes long enough to trigger currency crises and high inflation or both.
Sri Lanka’s central bank has the worst record among South Asian monetary authorities all of which have currencies derived from the Indian rupee at 4.70 to the US dollar at the time the Bretton Woods system was set up.
The Sri Lanka rupee had been depreciated to 203-208 levels from 4.70 when a Latin America style central bank was set up in 1950, compared to the second worst central bank in Pakistan which had busted its rupee to 160.
The Maldives Monetary Authority had given the most stability on an absolute basis, depreciating to only 15 units to the US unit, though on a relative level Bhutan and Nepal had maintained a 1 to 1 peg with the Indian rupee for about 7 decades.
However RBI is the third worst central bank after Pakistan.
Reserve Bank of India policy had deteriorated in recent years after its de facto anchor was shifted from a transparent 5 percent wholesale price index to a more opaque 2-6 percent consumer price index, critics say.
Bank of Bangladesh had maintained a peg at around 87 for almost a decade with less activist monetary policy, making the country an export powerhouse. (Colombo/July24/2021)