Sri Lanka’s year-on-year (YoY) inflation in December eased to 9.2 percent from 9.5 percent in November, the data released by the Department of Census and Statistics showed. However, the annual average inflation during the month of December rose to 7.6 percent from 7.2 percent in November. The month to month inflation also rose 0.9 percent.

The YoY food inflation eased to 9 percent in December from 10 percent in November, while nonfood inflation rose to 9.4 percent from 9.2 percent in November.

Sri Lanka’s Central Bank unexpectedly cut the policy rate by 25 basis points in its December monetary policy. The monetary authority also announced that the credit ceiling that was imposed in February has served its purpose and will be discontinued from next year.

According to a recent Deutsche Bank report, the Central Bank’s move is clearly preemptive in nature, as currently, inflation remains at an uncomfortably high level of 9.5 percent.

“But the Central Bank expects CPI inflation to moderate and stabilize in 2Q of 2013 (as we also do); hence, it deemed appropriate at this juncture to start cutting rates for supporting growth and also to induce a downward adjustment in market interest rates,” the report said.

It further noted that inflation is likely to stay at high single digits till February and then start moderating towards 6.5-7 percent by mid-2013.

“The only risk is if a supply shock (food and/or fuel) in 1Q prevents the moderation in inflation through 2Q and beyond, as currently expected as food items constitute 41 percent weight in the CPI basket and hence, any sharp swing in food prices affects headline CPI inflation readily. Consequently, a potential food price shock remains a key risk for Sri Lanka’s inflation outlook going forward,” the report stated.