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Apr 08, 2012 (LBO) - Sri Lanka has had single digit inflation for the past 38-months and no crisis in the banking system, despite a short-term weakening of the currency, Central Bank Governor Nivard Cabraal said.
"During the past 38 months inflation had been in the single digit level," Cabraal told the LBR-LBO Ceo forum, a gathering of senior executives in Colombo.
This is the longest ever period (since the liberalization of the economy in 1977) we have had single digit inflation.
"The only other time we have had inflation for even a lesser period was 23 months, was from august 1998 to June 2000."
Cabraal said inflation would be in the single digit for the foreseeable future as well.
In the year to March 2012, inflation accelerated to 5.5 percent from 2.7 percent a year earlier, amid steep currency depreciation.
Sri Lanka's central bank managed to keep inflation measured by Colombo Consumer Price Index low by Sri Lanka's past standards, but it was higher than levels seen in countries with more stable exchange pegs with the US dollar.
Critics have said that a key reason for Sri Lanka's steep inflation spikes have been a failure to pass on oil price increases to the economy. Subsidizing oil with credit, especially central bank credit (printed money) results in currency weakness and high inflation.
Passing oil price increases to economy kills demand helping keep prices down, especially if interest rates are also increased at the same time.
Sustained increases in oil prices (and food and other commodities) are usually caused by loose monetary policy in Sri Lanka's anchor currency country, the United States.
Analysts have also warned that Sri Lanka's Colombo Consumer Price Index, which has been manipulated several times to understate inflation, may be misleading policymakers.
However Sri Lanka also maintains a currency peg to the US dollar which comes to the rescue to the people.
Unlike the index, which can be easily manipulated, the exchange rate with the US dollar is transparent.
Sri Lanka has also maintained the exchange rate stability, for several years, even through a balance of payments crisis in 2008/2009.
Though inflation and currency depreciation has the same effect - of impoverishing the people and destroying lifetime savings - modern central banks, which targets a policy rate usually do not have a responsibility to keep the exchange rate stable.
The exchange rate fell from 109 to 131 US dollars over the past several months, amid high credit growth partly to manipulate energy prices and has since recovered to 125 rupees.
Though interest rates have been raised, there has also been some money printing in April to pay state salaries, the effects of which may hit forex markets in May. Such 'quantity easing' undermines higher interest rates, and may delay a correction in the exchange rate.
A stable exchange rate is the best protection against inflation and poverty. To maintain the exchange rate, monetary policy has to be tightened regardless of what a questionable index shows, and before it is too late.
http://lbo.lk/fullstory.php?nid=288786348
"During the past 38 months inflation had been in the single digit level," Cabraal told the LBR-LBO Ceo forum, a gathering of senior executives in Colombo.
This is the longest ever period (since the liberalization of the economy in 1977) we have had single digit inflation.
"The only other time we have had inflation for even a lesser period was 23 months, was from august 1998 to June 2000."
Cabraal said inflation would be in the single digit for the foreseeable future as well.
In the year to March 2012, inflation accelerated to 5.5 percent from 2.7 percent a year earlier, amid steep currency depreciation.
Sri Lanka's central bank managed to keep inflation measured by Colombo Consumer Price Index low by Sri Lanka's past standards, but it was higher than levels seen in countries with more stable exchange pegs with the US dollar.
Critics have said that a key reason for Sri Lanka's steep inflation spikes have been a failure to pass on oil price increases to the economy. Subsidizing oil with credit, especially central bank credit (printed money) results in currency weakness and high inflation.
Passing oil price increases to economy kills demand helping keep prices down, especially if interest rates are also increased at the same time.
Sustained increases in oil prices (and food and other commodities) are usually caused by loose monetary policy in Sri Lanka's anchor currency country, the United States.
Analysts have also warned that Sri Lanka's Colombo Consumer Price Index, which has been manipulated several times to understate inflation, may be misleading policymakers.
However Sri Lanka also maintains a currency peg to the US dollar which comes to the rescue to the people.
Unlike the index, which can be easily manipulated, the exchange rate with the US dollar is transparent.
Sri Lanka has also maintained the exchange rate stability, for several years, even through a balance of payments crisis in 2008/2009.
Though inflation and currency depreciation has the same effect - of impoverishing the people and destroying lifetime savings - modern central banks, which targets a policy rate usually do not have a responsibility to keep the exchange rate stable.
The exchange rate fell from 109 to 131 US dollars over the past several months, amid high credit growth partly to manipulate energy prices and has since recovered to 125 rupees.
Though interest rates have been raised, there has also been some money printing in April to pay state salaries, the effects of which may hit forex markets in May. Such 'quantity easing' undermines higher interest rates, and may delay a correction in the exchange rate.
A stable exchange rate is the best protection against inflation and poverty. To maintain the exchange rate, monetary policy has to be tightened regardless of what a questionable index shows, and before it is too late.
http://lbo.lk/fullstory.php?nid=288786348
