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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka's inflation falls by private citizen's measure

Sri Lanka's inflation falls by private citizen's measure

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
May 03, 2013 (LBO) - Consumer prices in Sri Lanka's urban areas rose 7.2 percent in April 2013 from a year earlier, according to a price index compiled by citizens down from 12.6 percent in March.

The index compiled by CAL Research, an equities research house found price rises of 21 percent in January 2013 when it was first published compared to only 9.8 percent showed by an index compiled by the state statistics office.

The state index however lacks key items such as alcohol which is heavily taxed from time to time. The absence of such items may understate price rise in the short term.

Sri Lanka's rupee fell in sharply from February 2013 to 134 to the US dollar breaking a peg at 110 and driving inflation up. The rupee has since appreciated.

The gap between the CAL index and the one compiled by the state has narrowed since its introduction.

In February, the CAL Index showed an increase in consumer prices of 17.2 percent in the preceding 12 months, and fell to 12.6 percent in February.

But by March the gap has narrowed to less than one percent with the state index showing 6.4 percent inflation.

CAL Research said it expected inflation to tick up following an electricity price hike this month.

Analysts say any Central Bank that actively targets inflation can moderate, nullify or reverse the effects of such increases which are usually referred to as a 'supply shock' by tightening monetary policy.

At a very basic level tightening monetary policy makes a paper fiat currency appreciate against real commodities or another currency such as the US dollar keeping overall inflation down.

Countries whose exchange rates appreciate sharply, such as in Japan can have deflation.

The International Monetary Fund has cautioned the Central Bank against loosening policy. IMF Resident Representative Koshy Mathai said the index may pick up 1 to 1.5 percent due to the electricity hike though he had not studied the matter in depth.

Central Bank Governor Nivard Cabraal said he believes there was room to cut rates now that inflation was falling and the monetary authority was selling down its Treasuries stock.

Sri Lanka has a pegged exchange rate where the Central Bank frequently intervenes in forex markets in addition to creating or draining money through open market operation by trading in Treasuries.

As long as the Central Bank keeps steadily selling down its Treasuries stock, which is a 'quantity tightening' type of transaction overall policy will remain tight and credit growth in check, analysts say.

Sri Lanka's interest rates are now high due to heavy state borrowings.
http://www.lankabusinessonline.com/news/Sri_Lankas_inflation_falls_by_private_citizens_measure/31938326

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