CB sees temporary inflation uptick due to utility, fuel price adjustments and govt.’s revenue boosting measures 

The Central Bank is forecasting a short-lived upward movement in inflation as a result of the cost-reflective energy and utility prices and revenue mobilisation measures the government may introduce in the upcoming months to boost its revenue to meet the International Monetary Fund (IMF) targets.

Sri Lanka’s official headline inflation was recorded at 1.3 percent in September, significantly easing from almost 70 percent exactly a year ago.

The Central Bank’s Economic Research Department believes that the disinflation process that continued for last several months is expected to turnaround from the third quarter and stabilise around 5 percent target level over the medium term.

However, Central Bank Governor Dr. Nandalal Weerasinghe cautioned that inflation could rise in the short-term due to increased fuel and electricity prices, as well as potential government revenue-boosting measures expected in the upcoming budget, before stabilising at the target level of 5 percent in the medium term.

He said Sri Lanka may experience inflation little higher than what could be expected under normal circumstances because of cost-reflective energy and utility prices and the revenue measures that may be introduced in the November budget. 

Last month, Sri Lanka increased fuel prices, and this week, cooking gas prices followed suit. An upward revision to electricity prices is also due. 
“We see that prices at global market remain high and there is talk that oil may reach US$ 100 per barrel. On top of that, the tax measures the government may introduce in the upcoming budget could also have some impact on inflation,” Governor Weerasinghe said.

“This could be the inflation outcome in the coming few months. As you can see that is not necessarily due to monetary conditions.”

“On the monetary policy point of view, we are yet to seeing any demand factors kicking in. As a result, there is slack in the overall aggregate demand. Economy is growing below the potential. The inflation target is at 5 percent and the current policy rates are at 10-11 percent. So, there is space for us to relax monetary policy further,” he said.

Govt. and CB ink pact to keep inflation at 5%

Meanwhile, Governor Weerasinghe said an agreement has been signed between the government and the Central Bank over maintaining inflation at 5 percent.
According to the new flexible inflation targeting legislation, the Central Bank is required to enter into an agreement with the government to ensure that inflation is maintained at a predetermined level.

“It’s a simple agreement. Inflation target is 5 percent, plus or minus 2 percent. The Variation would be assessed on the basis of quarterly average of two quarters. 
“If there is a deviation it will trigger other actions,” Weerasinghe said.

He said the agreement will be published by the Ministry of Finance on Monday.