Sri Lanka’s inflation pace reached single digits for the first time in 20 months, setting the stage for the central bank to slash borrowing costs further to support recovery.
(Bloomberg) — Sri Lanka’s inflation pace reached single digits for the first time in 20 months, setting the stage for the central bank to slash borrowing costs further to support recovery.
The consumer price index in Colombo rose 6.3% from a year ago in July, the Statistics Department said on Monday. That compares with a Bloomberg survey estimate of a 7.5% gain and a 12% rise in June. Retail prices were in single digits last in November 2021, according to data compiled by Bloomberg.
Weaker inflation gives space to policymakers to support the island nation’s economy after the worst crisis in seven decades. Sri Lanka’s central bank earlier this month cut the key lending rate for a second straight meeting and the next policy review is scheduled for Aug. 24.
“We expect CPI gains to ease further, driven by continued easing of supply constraints, lower commodity prices, and a high year-earlier base, said Ankur Shukla of Bloomberg Economics. He expects Central Bank of Sri Lanka to cut rates again amid focus on growth.
Central bank Governor Nandalal Weerasinghe expects price gains to reach single digits in the early third quarter, while the International Monetary Fund sees a 4%-6% inflation band in early 2025.
Foreign exchange reserves have risen in part due to rising dollar receipts from tourism and remittances. These increased inflows together with an IMF bailout and progress on debt restructuring is stoking hopes of a turnaround for Sri Lanka.
The multilateral lender will be holding its first review of its $3 billion loan program around September.
Investors will also watch for the impact of the falling currency on inflation. The Sri Lankan rupee tumbled more than 6% this month to become Asia’s worst-performing currency due to interest-rate cuts and loosening of import controls.
–With assistance from Tomoko Sato.
(Updates with analyst comments in fourth paragraph. A previous version of the story was corrected to fix the size and scope of inflation in second paragraph.)
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