Sri Lanka’s Inflation Held Near Five-Year Low in July

By Anusha Ondaatjie, 31st July 2009, www.bloomberg.com

Sri Lanka’s inflation held near a five-year low in July, giving the central bank more room to cut interest rates.

Consumer prices in the capital, Colombo, rose 1.1 percent from a year earlier after gaining 0.9 percent in June, the statistics agency said on its Web site today.

The Central Bank of Sri Lanka on July 13 kept interest rates unchanged, waiting to see if three reductions in borrowing costs this year are enough to stoke an economic revival after the end of almost three decades of civil war. The bank this month raised its 2009 growth forecast to as much as 4.5 percent from an earlier estimate of 2.5 percent.

“Commodity prices are unlikely to offer the same cushion they provided to consumer prices at the onset of the global slowdown,” said Shivantha Meepage, senior analyst at Acuity Stockbrokers Pvt. in Colombo. “The expected economic recovery following the end of the war and the lag effect of the central bank’s relaxed monetary stance would also create demand-side pressures towards the latter part of this year.”

Lanka IOC Plc, a unit of India’s largest oil refiner, and state-owned Ceylon Petroleum Corp. on July 2 raised diesel prices by 3 rupees (2.6 U.S. cents) a liter and gasoline prices by as much as 15 rupees a liter.

Central bank Governor Nivard Cabraal on July 21 predicted 2009 inflation at 5 percent.

The central bank has “reasonable space” to be flexible in monetary policy and will use “moral suasion” to encourage lending, Cabraal said last month.

“The prevalence of low inflation will be conducive to the growth prospects of the economy,” the central bank said in a July 2 statement.

The International Monetary Fund last week approved a $2.6 billion loan to Sri Lanka to help the island rebuild its economy and replenish international reserves.

The IMF expects Sri Lanka’s economy to grow at more than 3 percent this year and rebound in 2010.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.