Central Bank Governor Arjuna Mahendran expects inflation to come down from this month onwards, despite some speculating the possibility of demand-driven inflation amid state-sector salary increases and other welfare giveaways proposed in t he revised budget.“My expectation is t hat inflation will start to come down from February onwards. The impact of reduction in petroleum products in January and the impact of food prices reduction will have a major impact on inflation in the next two to three months,” Governor Mahendran said
Sri Lanka’s inflation spiked to 3.2 percent in January. The country’s headline inflation has been rising from December since it fell to over five-yearlow of 1.5 percent YoY in November, sounding alarm bells of a possible deflationary situation.
Sri Lanka, being an import-driven economy, is generally prone to inflation when the purchasing power of the people goes up. This is exacerbated, if the policy rates are kept low for a long period, with a weaker external sector.However, Mahendran seemed confident in controlling imports, so that the country’s trade deficit won’t get widened any further. He said the Central Bank is keeping a close tab on imports to avoid any unnecessary outflow of money.
He also said the new government will look at the exports side of the economy very seriously, whereas the previous government’s focus was on infrastructure projects, financial sector consolidation, etc.The new government has already announced its plan to set up new exports processing zones and provide the required bureaucratic support to ensure the exporters are not harassed.“Exporters before the election were not in a position to bring a lot of money to the country because of the uncertainty. Now that the election is over, there is optimism. We have already seen capital inflows.”
Meanwhile, Sri Lanka kept its policy rates at record low levels during the last monetary policy review, citing benign inflation, though some expected a change in the monetary policy with the new administration.Mahendran is of the view that policy rates can be brought further down once the inflation expectations become stable.
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