Higher inflation could keep Treasury yields up in near term: ICRA Lanka

Contrary to the expectations that the interest rates would stay lower for longer, ICRA Lanka expects the near-term Treasury yields could see some upward pressure from the rising consumer prices, which could be exacerbated by the recent hike in fuel prices, as the bond holders seek higher yields, which can beat inflation. 

Higher Treasury yields are typically a bellwether for higher market interest rates. 

Sri Lanka’s prices have been rising fast during 2021, as the consumer prices measured by the broader National Consumer Price Index have been rising constantly since the beginning of 2021, to touch the highest since September last year. 

Rising consumer prices were predominantly caused by the soaring food prices, due to faster return of demand during the first couple of months in the year and then by the supply chain disruptions caused by the lockdown-styled restrictions since April third week. 

In the most recent month, the consumer prices accelerated to 6.1 percent in May while the food prices rose by 10.3 percent over the same month a year ago. 

ICRA Lanka expects the recent fuel prices to further push inflation up, due to its cascading effects on every other commodity and service, adding pressure on the Treasury yields. 

“Fuel price hike and its spillover effect will force inflation rate up. This will keep pressure on the Treasury yields in the near term,” the rating agency said.