Inflation seen at 42-month high in July

• Weak rupee, price hikes, drought driving inflation-analysts
• CB expects easing in inflation on Govt. price cuts

Reuters: Sri Lanka’s annual inflation rate may have accelerated to a 42-month high in July as a drought pushed up local food prices and a weaker rupee aggravated import bills.

Annual inflation is expected to have accelerated to 9.4%in July, its highest since January 2009, a Reuters poll of 13 analysts showed. In June, prices rose 9.3%from a year earlier.

“We will see the impact of the drought and rupee depreciation in food prices this month, too,” one analyst said on condition of anonymity.

Food accounts for more than 40%of the basket of items used to compile inflation figures.

Central Bank Governor Ajith Nivard Cabraal told Reuters last week that annual inflation in July should come down after the government reduced import taxes on certain foods, though it will be not a substantial reduction.

The International Monetary Fund has said annual inflation may rise to 9.5%this year and stressed the need for Colombo to keep monetary policy focused on price pressures “for the time being.”

The global lender in its latest staff assessment report said last week that the current monetary policy stance is appropriate, and a tightening bias should be maintained in the near term until further evidence of diminishing inflation pressures and credit demand emerges.

The rupee has depreciated around 16%since November, pushing up costs for the $59 billion economy, which imports most essential food commodities as well as fuel. Consumer goods accounted for 20%of last year’s total $20 billion import bill.

The central bank in July kept its key policy rates unchanged after raising them twice since February to two-year highs, saying the spike in inflation was due to a lower base and that the impact of the drought and earlier policy measures have been yielding desired results.

Finance Ministry Secretary P.B Jayasundera last week said inflation is likely to be in upper singl- digit level during the next few months and will ease to 6%after six months.