Inflation climbs further above target

Colombo, July 1 (Daily Mirror) - Sri Lanka's inflation climbed further above the Central Bank's 5 percent target in June, deepening concerns over the cost of living and raising fresh questions over whether borrowing costs will remain elevated for longer.

Consumer prices rose 6.8 percent in June, marking the third straight month above the Central Bank's target after readings of 5.4 percent in April and 5.5 percent in May, and a sharp turnaround from the low inflation environment that had prevailed earlier in the year.

Households and businesses are already grappling with higher lending rates following the Central Bank's surprise 100-basis-point interest rate hike in May, its first rate increase since March 2023.

However, the International Monetary Fund (IMF) stopped short of sounding the alarm, saying it was too early to determine whether the latest reading represented a temporary spike or the beginning of a broader inflationary trend.

"Let us get back to you on this because this number just came out. It would be premature for me to comment on this because you have to remember also the quarterly basis, it's not just a monthly basis," IMF Mission Chief for Sri Lanka Evan Papageorgiou told journalists in Colombo yesterday.

The latest inflation print has drawn particular attention because it has now moved further beyond the Central Bank's target, potentially triggering closer scrutiny under the country's IMF-backed reform programme.

Papageorgiou noted that inflation performance is assessed against the Central Bank's target framework and that the Fund would evaluate the reasons behind any deviation before drawing conclusions.

"From the IMF perspective, the Monetary Policy Consultation Clause, that is, we adopt also the Central Bank's target and we evaluate the performance of inflation within that Central Bank target," he said.

"When the time comes and we go to the Executive Board, we will evaluate what is the outcome for inflation and whether if it's above or below, we have to consider how is this being met or not being met, and for what reasons."

The renewed rise in inflation threatens to erode purchasing power just as many families were beginning to see some relief from the steep price increases that followed the economic crisis.

For businesses, particularly those reliant on bank financing, the concern is whether higher inflation could delay any easing in lending rates, which have already risen to their highest levels since the May hike, the Central Bank's first tightening in over three years.

The IMF declined to speculate on future policy action. However, the implication is that officials are taking a wait-and-see approach until a clearer picture emerges on whether inflationary pressures are becoming entrenched.

The Fund's delegation, led by Papageorgiou, was in Colombo from June 24 to 30 on a staff visit, with Sri Lanka's programme performance to be formally assessed at the Seventh Review of the EFF arrangement, expected in September.