ECONOMYNEXT – Sri Lanka’s consumer prices in the capital Colombo rose 3.6 percent over 33 months since monetary stability was restored around September 2022, official data showed, though the index deflated 0.6 percent over 12 months.
The Colombo Consumer Price Index rose 0.9 percent in the month of June, after rising 0.8 percent in May driven by surging food prices, according to data from the Department of Census and Statistics.
The food sub-index grew 1.8 percent to 249.3 points in June, after rising 2.7 percent in May.
The food sub-index is 0.9 percent higher than the September 2022, when the central bank’s deflationary policy started to show up in the balance of payments.
Sri Lanka’s vegetable prices in particular have been in recent months, though there was some moderation in recent days.
Sri Lanka’s central bank is targeting 5 percent inflation which can go up to 7 percent and high levels of excess liquidity have been maintained in money markets.
Sri Lanka is a country that had broadly the same inflation as the US up to 1978, when anchor conflicts in the central bank’s operating framework worsened and sharply higher price increases were recorded even as the US regained monetary stability from 1980 onwards.
Anchor conflicts have been muted amid deflationary policy since September 2022, and the exchange has been stable for many months. The US Fed has also generally been running more prudent policy.
Sri Lanka is now targeting 5 percent inflation. Since the end of a war targeting 5 percent inflation has led to serial currency crises when private credit recovered, analysts have warned.
Up to now however the central bank has kept the exchange rate stable and interest rates have fallen as government borrowings reduced and the central bank itself preserved capital (savings) by not depreciating the currency.
However, concerns have been raised that that last rate cut (which was also not inflationary as the so-called mid-corridor rate was singalled up compared to credit demand just before the cut) may be risky. (Colombo/June30/2035)
