ECONOMYNEXT – Sri Lanka’s consumer prices rose 1.2 percent in the 30 months to March 2025 from September 2022, when the central bank’s deflationary policy started to show up in the balance of payments, while food prices were down 3.1 percent, official data show.
In the 12-months to March 2025, the index was down 2.6 percent registering ‘deflation’ after spiking food prices in December 2024.
The Colombo Consumer Price Index fell absolutely for the second month to 191.6 points in March from 192.2 points in February. The food price sub-index fell 1.3 percent in March, after rising steadily in the previous quarter.
The Colombo Consumer Price Index is now 1.2 percent up from September 2022, when the central banks, deflationary policy started to show up in the balance of payments.
Amid deflationary policy (contractionary sterilization of inflows) the central bank has also allowed the rupee to appreciate from 360 to around 300 to the US dollar. Under deflationary policy (at a appropriate interest rate) a central bank can control the exchange rate at will.
Sri Lanka regressed into inflationary policy in the last quarter with central bank printing up to 100 billion rupees to suppress interbank rates closely to around 8.5 percent under a so-called single policy rate.
Amid a slowdown in credit in January and ‘signalling’ of rates down to 8.0 percent, the printed money has been withdrawn.
The central bank its monetary policy decision in March kept the mid corridor rate at 8.0 percent, which is only 1 percent above its inflation target of 5-7 percent.
Sri Lanka’s central bank has maintained exceptional deflationary policy in the style many East Asian nations did from the 1960s, except for the last quarter of 2024, providing a strong foundation for growth to resume.
Under deflationary policy and strong exchange rate, which prevented savings from being inflated away, Sri Lanka invested or loaned out more money that it got (ran a current account surplus).
Analysts have warned that after private investment credit picks up, the so-called ‘single policy rate’ could lead to external instability, missed foreign reserve targets triggering overall loss of confidence and a second defaults as well as social unrest from depreciation as happened from 2015.
Mid corridor targeting with inflationary open market operations creates an abundant reserve regime, triggering currency crises without a war.
Sri Lanka’s inflation was also helped by better monetary policy from the Federal Reserve, which has raised rates and is trimming its abundant reserve regime, though years of aggressive macro-economic policy has busted budgets. (Colombo/Mar28/2025)
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