7 March 2023 01:02 am Views - 166
Dr. Nandalal Weerasinghe PIC BY NIMALSIRI EDIRISINGHE
The Central Bank last Friday projected a faster decline in the rate of inflation in the coming months, as businesses and households will benefit from the relative strength in the rupee in recent times, which gets translated into lower imported goods prices.
However, Central Bank Governor Dr. Nandalal Weerasinghe said some commodity prices such as energy could fall faster than the rest, as their prices are determined based on automatic pricing formula pinned to the global commodities prices.
The other prices in the economy could come down faster than the authorities previously anticipated in their inflation projections, in the absence of any exogenous factors.
The Central Bank and International Monetary Fund (IMF) had conflicting views on the future inflation path, which resulted in a 100-basis-point surprise policy rate hike last week.
While the Central Bank’s projections show a faster decline in inflation towards its desired range of the 4 to 6 percent band by the year’s end, the IMF appears to be taking a more cautious view and is feeling uneasy about the extremely high inflation prevailing at present.
However, Dr. Weerasinghe, who clearly showed displeasure towards the policy decision that had to announce on Friday, said people can judge whose projections were more accurate by the end of the year.
The monetary policy typically has long and variable lags and hence, overdoing monetary tightening could break the economy, sometimes taking a lot more effort and time to recover.
Some analysts, including First Capital Research, have been calling for policy easing before the economy reaches an irrecoverable breaking point.
Sri Lanka tightened its monetary policy by a record 950 basis points in 2022, which helped the country to break the inflation spiral as early as September.
Sri Lanka’s Colombo inflation further cooled down to 51.7 percent in February from a year earlier levels, declining for the fifth consecutive month.
Meanwhile, the so-called core inflation, barring often-volatile food, energy and transport, declined to 43.6 percent, from 45.6 percent through January.
Sri Lankan economy has turned a corner faster than many would have expected and political and social stability are sine-qua-non for the full recovery, which could be expected from as early as end of this year.