CB maintains mid-term inflation band at 4-6% levels despite continuously elevated prices

• Many believe recently announced US$ 1bn relief package will increase price pressures
• New taxes coming to effect in April also expected to fuel inflation with corporates passing impact to consumers

Despite the prevalent elevated consumer prices, the Central Bank said it would maintain its mid-term inflation band between 4 to 6 percent levels,  as officials expressed optimism that prices would decelerate as demand cools down and supply chain troubles dissipate. 

Price pressures are expected to grow further with many finding the recently announced billion dollar worth relief package to be inflationary while others expect the new taxes which are expected to come into effect from April on corporates to result in a massive pass through effect on day-to-day products and services. 

Sri Lanka’s headline consumer prices rose by 12.1 percent in the twelve months to December 2021, the highest in twelve years, while the core prices logged an 8.3 percent increase in the same period making inflation one of the central issues being fought by the government, alongside the forex crunch.

“What we see is that these rates that are prevailing today are not rates that we would like to see happening for too long. So we are of the view that it is temporary as the central banks all over the world have mentioned that they also believe there would be a sharp reduction in prices worldwide,” Central Bank Governor Ajith Nivard Cabraal told a recent press conference.  

“And if that happens with oil prices, gas prices, milk food prices as well as prices of so many other commodities would affect our own inflation numbers as well. 

And at that stage, we would find that we are getting back to the earlier numbers we were used to. That’s the way we are approaching it. Right now for a certain extent we are grappling with world prices over which we have no control,” he said in response to query as to whether the Central Bank was considering raising the inflation band to a higher level. 

None of the global central banks either raised their desired inflation levels or are contemplating to do so. Instead, they are taking preemptive, and sometimes delayed actions by reining in liquidity and raising interest rates. 
For instance, the United State Federal Reserve, last week penciled in at least three rate hikes starting from March this year. The inflation in the US hit a 40-year high of 7.0 percent in December, whereas their target inflation level is 2.0 percent.

The Central Bank on January 20 raised policy rates by 50 basis points, the second such instance since August last year to fend off any demand-driven inflationary pressures while believing that the supply side price pressures would fix on their own this year. 

However, the trajectory of inflation and how long it will stay at elevated levels around the world is a highly divided topic among economists and analysts who have been continuously watching the inflation readings to make portfolio and asset allocation decisions.