Sri Lanka’s Inflation Accelerates to a 26-Month High of 8.6%

Sri Lanka’s inflation accelerated
to a 26-month high, increasing pressure on the central bank to
raise interest rates.

Consumer prices in the capital, Colombo, climbed 8.6
percent in March from a year earlier after gaining 7.8 percent
in February, the statistics department said on its website
today. The median estimate in a Bloomberg News survey of five
economists was for an 8.9 percent increase.

Sri Lanka’s central bank has refrained from raising rates
since 2007, saying prices are rising because of “supply
constraints” caused by floods. The island nation’s policy
stance contrasts with Asian nations from South Korea to India,
which are boosting borrowing costs to tame prices.

“If supply shortages persist, the central bank will have
to decide on tightening the monetary policy,” Waruna
Singappuli, head of research at NDB Stockbrokers Pvt. in
Colombo, said before the report. Growing credit demand and
higher fuel costs may spur price pressures, he said.

Inflation is being stoked by higher food costs caused by
floods in the country, and prices will ease after April as
supplies rise, the central bank said March 28. Sri Lanka’s
northern and eastern regions were inundated by floods in January
and February, destroying crops.

Reduced government borrowing and a stronger rupee would
help mitigate price pressures, the central bank said.

Rate Policy

The Central Bank of Sri Lanka left rates unchanged on March
8 after reducing them in January for the third time since the
start of July.

Sri Lanka’s economy grew 8.6 percent last quarter, capping
the fastest annual expansion in more than three decades, as the
end of a 26-year civil war in May 2009 boosted consumer demand
and investment.

Inflation is still less than the average 11.5 percent in
the five years through December 2010 as an expansion in farm
cultivation after the war spurred agriculture production.

Inflation may slow to a range of 6 percent to 7 percent by
the end of 2011, the central bank said in its March 28
statement.

“Unpredictable weather conditions” and higher
international commodity prices, especially oil, could cause a
“one-off increase in inflation,” the bank said.

The island nation may have to raise fuel prices, President
Mahinda Rajapaksa said March 28.

Sri Lanka’s next monetary policy announcement is scheduled
for April 19.

The Reserve Bank of India has boosted rates eight times in
the past year compared with three in China and four in South
Korea. Indonesia lifted its reference rate last month for the
first time this year after opting not to join counterparts in
increasing rates in 2010.

To contact the reporter on this story:
Anusha Ondaatjie in Colombo at
anushao@bloomberg.net

To contact the editor responsible for this story:
Stephen Foxwell at
sfoxwell@bloomberg.net

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