Sri Lanka’s Inflation Rises. Central Bank Keeps Rates Steady in the Face of less Price Pressure despite Floods

28th February 2011, www.bloomberg.com

Sri Lanka’s inflation accelerated to a 25-month high in February, which may curb the central bank’s scope to lower interest rates again.

Consumer prices in the capital, Colombo, rose 7.8 percent from a year earlier after gaining 6.8 percent in January, the statistics department said on its website today. That compares with the 7.4 percent median estimate in a Bloomberg News survey of eight economists.

Central bank Governor Ajith Nivard Cabraal cut borrowing costs for the third time in seven months in January to support economic growth, contrasting with neighbors from India to China that have raised them to damp inflation. Cabraal this month kept rates unchanged, saying the island faces “less” price pressure than neighbors even after floods damaged crops.

“Sri Lanka needn’t get too worried because it isn’t yet facing demand-driven inflation,” Waruna Singappuli, head of research at NDB Stockbrokers Ltd. in Colombo, said before the report. “But the authorities may take a break on rate cuts and keep a check on supply-side price gains by other means like more tax cuts.”

The government raised electricity tariffs by 8 percent for users of more than 120 units from January, while reducing rates by 25 percent for institutions including government hospitals and schools.

Heavy rains in January and early February caused floods in the north and east of the island nation, destroying rice and vegetable crops, displacing more than one million people and killing about 50, according to government estimates.

Food Shortages
Sri Lanka may face shortages in vegetables and pulses, K.E. Karunathilaka, the top bureaucrat in the agriculture ministry, said Feb. 7. The island needs to watch inflation pressures from supply shortages “closely,” Cabraal said earlier this month.

To help keep prices under control, Sri Lanka in January almost halved import taxes on milk powder to 28 rupees (25 cents) a kilogram and slashed customs duty on gasoline by 67 percent to five rupees a liter.

Sri Lanka’s economic outlook is good, and the floods will cause a “temporary” rise in prices, Brian Aitken, the International Monetary Fund’s mission chief for Sri Lanka, said Feb. 18.

The island is aiming to accelerate economic growth to 8.5 percent in 2011 and 9 percent in 2012 from an estimated 8 percent expansion in 2010, Cabraal said last month.

Sri Lanka’s next monetary policy announcement is scheduled for March 8.

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

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net

Related Info :

• Sri Lanka Central Bank Cuts Rates for Faster Economic Growth while Counterparts in India and Pakistan Raised Them