18 December 2021 12:46 am Views - 1950
Credit rating agency ICRA Lanka said consumer prices, which hit nearly a decade high last month, indicate that the economy might have entered an era of higher prices and the trend could persist in the next few months, proving that it is no longer transitory as repeatedly claimed by the Central Bankers.
The Central Bank in November said inflation could accelerate in the near term but expected such spurts in prices to be largely “transitory”, a term widely used by central banks around the world to define price pressures caused largely by supply chain disruptions. Until recently, they believed the supply-side inflation would abate on its own.
But the United States Federal Reserve on Wednesday dropped the word altogether and indicated that inflation is the greatest to the US economy at present, prompting it to double the pace of the tapering of its bond buying programme, which pumped the markets with a massive US $ 120 billion worth of money every month since the beginning of the pandemic.
American inflation hit nearly four-decade high in November, when consumer prices rose by 6.8 percent from a year earlier period.
Some local economists and analysts view that the consumer prices, which surged by 9.9 percent in November 2021, the highest since July 2012, might be the peak inflation and prices would start decelerating thereafter, due to both the base effects of the previous period and the easing of supply chain bottlenecks caused by the pandemic.
But ICRA Lanka thinks otherwise.
“Inflation jumped to record level in November, driven by supply shocks. In this context, Sri Lanka may enter an era of high inflation in the next few months,” the rating agency said in its monthly economic update released yesterday.
ICRA Lanka has a track record of largely been accurate in their inflation forecasts in previous occasions.
Rising inflation in turn put upward pressure on bond yields and thereby the market lending rates as the bond holders seek higher returns to protect themselves against negative real returns.
Under these circumstances, ICRA Lanka continues to weigh in on the rising lending rates, which could then dampen the demand for private credit.
The private sector credit growth also decelerated quite substantially during September and October after hitting a peak in August. Slowdown in private sector activities could slow the recovery of the economy, which contracted by 1.5 percent in the third quarter.
The September quarter disappointment has prompted the ratings agency to cut its full-year growth outlook.
“In light of this, we will be revising our earlier GDP projection for 2021 (3.4 percent) shortly,” ICRA Lanka said.
“The CBSL expects the economy to record 5 percent growth this year, which we feel is optimistic, especially given the country has recorded two quarters of economic contraction,” it added.
Under these circumstances, the Central Bank has a difficult balance to maintain through its monetary policy, as early increase in rates could decelerate inflation but dampen the growth prospects for the economy, which has had sub-par growth rates for five years before shrinking by 3.6 percent in 2020, due to the pandemic.
Another virus wave could be disastrous for the economy, which has shown strong signs of recovery in the ongoing fourth quarter, the PMI data for October and November showed.
ICRA Lanka, in reference to the Omicron variant, which is currently sweeping across Africa, the UK and Europe and North America, underscored the significance of keeping the situation under control to avoid further disruptions to the economy, which cannot afford another lockdown.
“Though mild, the rapid rate at which Omicron is spreading is somewhat alarming,” the rating agency said.
“It is important to keep the situation under control to avoid further disruptions to the economy,” it added.