CB says policy rates appropriate

Reuters: Sri Lanka’s current monetary policy rates are appropriate despite a spike in inflation last month due to supply constraints, the Central Bank said on Tuesday, a day ahead of its July monetary policy review announcement.

The Central Bank has kept both repurchase and reverse repurchase rate at two-year highs of 7.75 percent and 9.75 per cent, respectively, since April, despite a pickup in annual inflation to a 41-month high in June.

“Those are appropriate,” Central Bank Governor Ajith Nivard Cabraal told Reuters in an interview.

“The only reason why we do not see a major need to make changes is that the spiking of inflation last month is entirely due to supply side factors. It has nothing to do with the demand side. The demand side is very much under control.”

The Central Bank will announce its July policy rates on Wednesday at 0200 GMT.

Annual inflation hit 9.3 per cent year-on-year in June, its highest since January 2009, as a sharp depreciation of the Sri Lankan Rupee amplified import costs, and as food prices were hit by supply constraints due to drought and government policies to discourage selected imports.

The International Monetary Fund (IMF) said on 15 June that annual inflation may accelerate to 9.5 per cent this year and stressed the need for Colombo to keep monetary policy focused on price pressures “for the time being”.

Cabraal said the Central Bank has discussed policies with relevant officials regarding food supply constraints.

“With the policies that could deal with the supply side, we are confident of inflation easing,” he said, without elaborating on the policies that are intended to reduce prices of vegetables and other locally produced farm products.

Sri Lanka has not seen double-digit annual inflation since January 2009.

It adopted a new consumer price index in June last year, angering opposition politicians who accused the government of manipulating the data to lower the inflation rate and to cool discontent over the rising cost of living.

Despite the spike in the annual inflation, Cabraal said the bank’s annual inflation target of 7-8 per cent is still achievable.

“We have seen no reason to change that (target),” he said. “If the policies are working, especially supply side, we will see those targets remaining where we have projected.”