Sri Lanka Central Bank’s Decision Vindicated, Inflation Rises

30th December 2009, www.bloomberg.com, By Anusha Ondaatjie

Sri Lanka’s inflation accelerated to a nine-month high in December, vindicating the central bank’s decision to pause its policy of cutting interest rates.

Consumer prices in the capital, Colombo, rose 4.8 percent from a year earlier after gaining 2.8 percent in November, the statistics agency said on its Web site today. That was more than the median 4.2 percent forecast in a Bloomberg News survey of six economists.

Policy rates are appropriate to support growth and are likely to remain at current levels “in the near future,” Central Bank of Sri Lanka Governor Nivard Cabraal said last month. The Colombo-based bank wants to help boost growth to as much as 6 percent in 2010 from 3.5 percent this year.

“The central bank may have to start raising rates in the second quarter of next year,” Danushka Samarasinghe, research manager at Asia Securities Ltd. in Colombo, said before the report. “The growth target won’t be threatened with prices rising as consumption and investment will keep going up.”

The central bank has cut lending rates five times this year to revive growth as inflation plunged from a record high in June 2008 to a five-year low in September.

On Dec. 14, Cabraal maintained the reverse repurchase rate at 9.75 percent, a five-year low, and kept the repurchase rate at 7.5 percent.

Cabraal said in October he expects consumer prices to rise as much as 5 percent this year, and between 5 percent and 6 percent in 2010.

Faster Growth

Gross domestic product expanded 4.2 percent in the third quarter from a year earlier, the fastest pace this year, after gaining 2.1 percent in the three months to June 30, the statistics department said Dec. 18.

Sri Lanka’s exports in October declined 4.9 percent, the least this year, as orders increased for the South Asian island’s tea and rubber.

The recovery in exports from Sri Lanka, which makes garments for Marks & Spencer Group Plc and Gap Inc., may falter as the European Union plans to withdraw trade concessions on alleged human rights violations by President Mahinda Rajapaksa’s government.

Sri Lanka will maintain fiscal and monetary stimulus through 2010 to bolster the economy, Deputy Finance Minister Sarath Amunugama said Nov. 9.

The International Monetary Fund, which granted Sri Lanka a $2.6 billion loan in July to rebuild roads and schools, expects the island’s economic growth and credit demand to pick up from this year.

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