Image Credit - Bloomberg

• Projections show YoY backing down to 56.6% by Dec-22 before falling back to 5.4% after a year 
• Analysts reiterate any relaxation of monetary policy wouldn’t risk flaring up inflation pressures
• Says monetary stimulus via a relaxation of the policy is not projected to distort the inflation outlook

First Capital Research (FCR) forecasts a possible decline in consumer prices starting from October after inflation was believed to have peaked in September due to muted demand conditions and the likely moderation in the supply side price pressures coming from a looming global economic slowdown.  

Analysts observed a deceleration in the month-over-month increase in prices since July in the consumer price index as a forerunner for the possibility of the decline in inflation in October, turning around the relentless increase seen in prices since the middle of last year. 

Headline inflation measured by the Colombo Consumer Price Index, the officials’ preferred price gauge, rose by 69.8 percent in September from a year ago, the highest level seen in Sri Lanka. 

However, the FCR forecasts this inflation to decelerate to 62.0 percent in October before slowing down to 56.6 percent by December this year. Their model further forecasts the year-on-year inflation returning to 5.4 percent by the end of next year, bringing down the prices to Central Bank’s desired inflation range of between 4 to 6 percent. 

This was one of the reasons why the analysts at FCR said the economy would be primed for a turn in the monetary policy from around the end of the first quarter next year, just about when runaway prices will be over.  

Therefore, they reiterated that any relaxation of monetary policy wouldn’t risk flaring up inflation pressures as the demand conditions are at their minimum. 

“Accordingly, as the demand push inflation is at its minimum, monetary stimulus via a relaxation of the policy is not projected to distort the inflation outlook of the country”, FCR said.

Though the Central Bank too likes to believe that inflation may have peaked in September, they refused to give any indication as to when they could back down from their tightest monetary policy as they want to see a meaningful and a persistent reduction in prices before easing policy.  

However, the language coming from the Central Bank, which was neither hawkish nor dovish, suggests they could pause at current levels before announcing some easing towards next year as the economy continues to decline through 2023 by 4.2 percent, after a 9.2 percent contraction this year, according to most recent World Bank projections. 

Analysts remain worried that continuous decline could inflict irreversible damage to the economy if  authorities delay their intervention through some stimulus.