COLOMBO: Sri Lanka’s central bank is expecting inflation to reduce to its target range of mid-single digits in 2018, with near term monetary policy to be data driven, Central Bank Governor Indrajit Coomaraswamy said, after generating over 7 percent inflation in 2017.
“By the end of the first quarter (of 2018) we will be within the target range of 4-6 percent,” Coomaraswamy told reporters.
The central bank generated 7.1 percent inflation measured by a revised Colombo Consumer Price Index in 20187 which spiked to 7.8 percent in October, after generating 4.5 percent in 2016 and 4.6 percent in 2015, despite falling global commodity prices.
Global commodity prices have started to pick up in 2017.
The rupee has collapsed from around 131 to 153 to the US dollar during the last year three years due to massive money printing in 2015 and 2016 but falling commodity prices kept the prices of traded goods muted in the first two years.
Monetary policy is tighter now with higher interest rates and liquidity in money markets being generated from central bank forex purchases and being steadily withdrawn (sterilized), helping build up forex reserves.
The central bank kept its overnight policy rate at 7.25 percent to withdraw excess liquidity and 8.75 percent to inject cash (print money) at its December monetary policy meeting, while market rates fell amid slower credit.
With money markets having excess liquidity amid lower credit growth with a more controlled budget deficit, the central bank buying dollars generating liquidity, interbank rates are now near the lower policy corridor indicating that the active policy rate is 7.25 percent.