ECONOMYNEXT – Sri Lanka’s country-wide inflation measured by the National Consumer Price Index rose 8.3 per cent in the 12-months to October, to a four year high after record money printing to maintain low-interest rates.
The National Consumer Price Index grew 2.1 percent in October to 150.6 points. The food sub-index grew 1.9 percent to 162.6 percent. In the 12-months the food sub-index grew 11.7 percent.
The 12-month inflation accelerated from 6.2 percent in September.
Sri Lanka has been printing large volumes of money for over two years and in September 2021, the reserve ratio was doubled to 4.0 percent and the entire increase was also printed in an extraordinary move.
Economists and the media had been warning Sri Lanka’s central bank that money printing creates forex shortage in an unstable peg or ‘flexible exchange rate’ and eventually high inflation especially when the policy of the anchor currency is also bad.
Commodity prices which respond to money printing and forex depreciation quickest had surged driving up food prices.
The central bank started its current bout of inflationary policy around August 2019 buying bonds through open market operations and sharply ratcheted up money printing around February 2020, triggering a 6 billion US dollar balance of payment deficit.
The agency claim to generate only 4-6 percent inflation, but regularly exceeds its own target after printing money and triggering currency collapses.
The 12-month inflation in October 2021 is the highest since the 8.4 percent recorded in April 2017, when Sri Lanka was recovering from a currency crisis and money printing bout in 2015/2016.
Sri Lanka has been running into a currency crisis in close succession under ‘flexible inflation targeting’ operated by keeping a call money rate low with liquidity injections despite operating an unstable peg or flexible exchange rate, critics have said.
Sri Lanka’s food prices based on the index had risen 23.4 percent over the past two years. Since the inflationary policy began from around August 2019, the food index had risen 28.5 percent.
Though the money printing central bank was set up in 1950 supposedly to have ‘independent monetary policy’ officials regularly blame global commodity prices when the Fed runs loose policy, while domestic inflation is amplified by currency depreciation and low rates. (Colombo/Nov23/2021)