Sri Lanka expects inflation to rise next month

Mar 28, Colombo: Although a drop in the annual average inflation is expected in March due to the decrease in food prices observed since February, the inflation on year-on-year basis is likely to increase to around 8 per cent in March 2011 due to the low base a year ago, the Central Bank said.

A decline in the Colombo Consumers’ Price Index (CCPI) has been observed since the last week of February due to a gradual reduction of prices, particularly, for most varieties of vegetables, rice, fish and sea food, and other necessary food items, the Central Bank said in a statement released today.

The Bank expects the upward trend of the annual average inflation to continue in April 2011 as well, mainly due to the festive demand and the base impact.

However, the Central Bank says with stocks being released to the market and the expected increase in the extent of cultivation during the Yala season, prices are expected to remain low during the latter period of 2011.

“Accordingly, year-on-year inflation is expected to decelerate from May 2011 onwards to reach 6.0-7.0 per cent by the year end, although annual average inflation may follow an increasing trend during the balance period of the year to record around 7 per cent by December 2011,” the Bank said in its statement.

Although the country’s monetary authority expects a high economic growth in 2011 due to the performance in the key sectors of the economy, the negative impact of unpredictable weather conditions may cause temporary price increases, the Central Bank warned.

Meanwhile, Sri Lankan President expressed concern that the crises in West Asia and North Africa and the economic crisis in the West will negatively affect Sri Lanka’s foreign remittance through foreign employment and said the country has to look towards alternatives such as Korea.

On a positive note, the Central Bank noted that the ongoing fiscal consolidation process has lowered the fiscal deficit and therefore the reduced need for the government to borrow from the banking system will reduce demand side pressures on inflation.

The appreciating trend of the rupee in the foreign exchange market is also expected to mitigate the impact of adverse movements of international commodity prices on domestic inflation, the Bank pointed out.

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