Sri Lanka’s inflation rate accelerated to its highest in 42 months, outpacing market expectations as an extended drought and depreciation of the rupee currency weighed on food prices even though the government cut some import taxes.
Annual inflation jumped to 9.8 per cent in July from a year earlier, up from 9.3 per cent in June. It was the highest recorded figure since January 2009, data released by the state-run Department of Census and Statistics showed.
Analysts polled by Reuters had forecast annual inflation in July would pick up to 9.4 per cent, while Central Bank Governor Ajith Nivard Cabraal had said it would ease from last month’s 9.3 per cent. “We are a little disappointed,” Cabraal told Reuters after the release of the data. “We thought there will be an ease on the basis that the government reduced import taxes of several food items including sugar.”
Sri Lanka has seen drought in some major farm areas since March and that has resulted in shortages of vegetables and rice.
Cabraal, however, ruled out any monetary policy response to rising prices.
“This is nothing to do with the demand side. This is mainly due to administered prices taking effect. So I can’t see any need for policy measures.”
The central bank in July kept its key policy rates unchanged after raising them twice since February to more than two-year highs, saying the increases were enough to moderate the expansion of both credit and the trade deficit. Analysts also attributed the rise in inflation to a sharp depreciation of the rupee.
Last week, Treasury Secretary P.B. Jayasundera said the island nation would return to 6 per cent inflation in the next six months, after fully realising the benefits of policy adjustments in interest and exchange rates. The rupee has depreciated 16 per cent since November when the government devalued it by 3 per cent before allowing a flexible exchange rate, pushing up costs for the $59 billion economy, which imports most essential food commodities as well as fuel.
Consumer goods accounted for 20 per cent of last year’s total$20 billion import bill. Annual average inflation, measured on a 12-month moving average, rose to 6.0 per cent, from 5.8 per cent in June.
Ajith Nivard Cabraal told Reuters last week that annual inflation in July should come down after the government reduced import taxes on certain foods, though it will be not a substantial reduction.
The International Monetary Fund (IMF) has said annual inflation may rise to 9.5 per cent this year and stressed the need for Colombo to keep monetary policy focused on price pressures “for the time being.” (Reuters)