Aug year on year inflation seen steady at 7.5%

Annual inflation is expected to have stabilized at 7.5 percent, unchanged from July, measured on a new index with a 2006/7 base year, according to a Reuters poll of 14 analysts, while 12-month moving average inflation is expected to have inched up to a record 7.2 percent under the new index, from last month’s 7.0 percent.

Factors to watch

If the supply side has moderated. The central bank says headline inflation is expected to decline further in the months approaching as continued domestic supply side improvements are expected to offset price adjustments due to movements in international commodity prices.

If a 156 Sri Lanka rupee ($1.42) price increase per 12.5 kg LP gas cylinder during the month has a significant impact on annual inflation. Gas accounts for 2 percent of the latest consumer basket considered for the index.

Whether threats of demand-driven inflation are easing and private-sector credit growth is cooling. The central bank raised commercial banks’ statutory reserve ratio by 1 percentage point to 8 percent in April to squeeze liquidity in order to curb demand-driven inflation. Credit growth hit a 16-year high of 34.4 percent in June year-on-year, though the rapid expansion was partly due to a low base in the previous year the central bank was maintaining a pro-growth monetary policy.

Whether post-war economic growth is overheating or if it still has the capacity to expand in a low inflationary and interest rate regime.

If central bank will allow further appreciation of the rupee to curb imported inflation after getting the proceeds from a $1 billion sovereign bond and further relaxing the foreign exchange controls.

Market Impact

Lower inflation means investors and corporate will be more willing to borrow more and invest to expand while people will tend to borrow for personal spending. Banks will be generous in lending to boost profits. Corporates, at the same time, will wait to see where the official inflation moves amid the sharp rise in food and other commodity prices.

Low interest rates and inflation will push more investors into the Colombo Stock Exchange , due to lower returns from fixed income instruments.    

Following is the poll’s forecast for the August  inflation data due to be released on Tuesday:  (Inflation figures are in percent)

 CCPI    Index    vs year ago    12-Mo Avg

 Median    152.0    7.5    7.2

 Average    151.8    7.4    7.2  

 Low    151.1    6.9    7.2  

 High    152.7    8.0    7.2  

 No. of contributors    14    14    14  

 Note: The following contributors participated in the poll: Commercial Bank of Ceylon, HSBC, National Development Bank (NDB), Bank of Ceylon, Citibank, People’s Bank, TKS Securities, Standard Chartered Bank, Hatton National Bank (HNB), Nations Trust Bank, CT Smith Research, Asia Capital, Frontier Research and IIFL Ceylon Securities.