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July 26, 2011 (LBO) - Sri Lanka should keep inflation below 7.0 percent to ensure economic stability Treasury Secretary P B Jayasundera said, as lower levels of inflation may be beyond the capacity of economic policies to deliver.
"If inflation is kept below 7.0 percent that's fine," Jayasundera told members of Sri Lanka's Joint Apparel Exporter's Forum.
"You need not get panicked over inflation if it is below 7.0 percent. We do not have to be over ambitions and target 01 percent, 02 percent. Those are not realistic, because policy actions depend on what we target."
Sri Lanka's inflation eased to 7.1 percent in June after spiking to 8.2 percent in May. Central Banks in many Asian nations however are delivering lower levels of inflation.
Sri Lanka's rupee is pegged to the US dollar and its inflation is de facto 'externally anchored' to the US dollar which sets a floor for the country's inflation.
Additional inflation is created by central bank credit, such as liquidity facilities given to banks or money printed to finance budget deficits.
Many Asian nations, including dollar pegged ones, however have lower levels of inflation than Sri Lanka.
In India the so-called 'panic level' is 5.0 percent. Reserve Bank of India is scrambling to rein in inflation following a bout of earlier loose fiscal and monetary policy.
India's policy rate at which cash is injected to banks (rupees are printed through liquidity facilities) is now 7.50 percent, and excess money is withdrawn at 6.50 percent. Another rate hike is expected shortly.
The equivalent in Sri Lanka is 8.50 percent and 7.0 percent.
India however has a more freely floating exchange rate. Better managed countries in Asia and the Pacific have inflation rates of around 2.0 percent. Some such as Australia and New Zealand has inflation targeting laws.
Before the creation of a dollar pegged central bank in 1950, which allowed rulers to manipulate interest rates by printing money, deficit spend and depreciate the currency, Sri Lanka's rupee was anchored to the Sterling via a hard peg or currency board.
"If inflation is kept below 7.0 percent that's fine," Jayasundera told members of Sri Lanka's Joint Apparel Exporter's Forum.
"You need not get panicked over inflation if it is below 7.0 percent. We do not have to be over ambitions and target 01 percent, 02 percent. Those are not realistic, because policy actions depend on what we target."
Sri Lanka's inflation eased to 7.1 percent in June after spiking to 8.2 percent in May. Central Banks in many Asian nations however are delivering lower levels of inflation.
Sri Lanka's rupee is pegged to the US dollar and its inflation is de facto 'externally anchored' to the US dollar which sets a floor for the country's inflation.
Additional inflation is created by central bank credit, such as liquidity facilities given to banks or money printed to finance budget deficits.
Many Asian nations, including dollar pegged ones, however have lower levels of inflation than Sri Lanka.
In India the so-called 'panic level' is 5.0 percent. Reserve Bank of India is scrambling to rein in inflation following a bout of earlier loose fiscal and monetary policy.
India's policy rate at which cash is injected to banks (rupees are printed through liquidity facilities) is now 7.50 percent, and excess money is withdrawn at 6.50 percent. Another rate hike is expected shortly.
The equivalent in Sri Lanka is 8.50 percent and 7.0 percent.
India however has a more freely floating exchange rate. Better managed countries in Asia and the Pacific have inflation rates of around 2.0 percent. Some such as Australia and New Zealand has inflation targeting laws.
Before the creation of a dollar pegged central bank in 1950, which allowed rulers to manipulate interest rates by printing money, deficit spend and depreciate the currency, Sri Lanka's rupee was anchored to the Sterling via a hard peg or currency board.
