Inflation shows signs of deceleration

Inflation, which became a global concern over the past year with the unexpected surge in world fuel and food prices, has shown signs of deceleration in Sri Lanka from July 2008.

Since reaching a peak of 28.2 per cent, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002) in June, inflation has indicated a turnaround, as expected, by falling slightly to 26.6 per cent in July.

This decline was supported by improvements in domestic supply side factors and the containment of demand pressures. With the easing of commodity prices in international markets, external price pressures on domestic inflation are likely to further abate in the months ahead.

In terms of the Central Bank’s policy of restraining from investing in new Treasury bills, the Bank had exhausted its stock of Treasury bills available for open market operations. Hence, the Bank has moved to issuing its own securities to mop up the excess liquidity and contain reserve money growth to the target level.

The Central Bank’s tight monetary policy stance has enabled it to successfully maintain its operational target, namely, reserve money, within the targeted path during the first half of the year as well as thus far during the third quarter.

This, in turn, has checked the high monetary expansion, which has been on a decelerating trend since early, 2008. Accordingly, the broad money growth decelerated from 16.6 per cent at end 2007 to 13.6 per cent by end June.

Credit to the private sector, which was on a higher than desired growth path and remained a concern of the Central Bank, also decelerated to 12.7 per cent by end June, from the higher growth rates ranging from 20-26 per cent in 2007.

As such, the tighter monetary policy stance has yielded its desired impact on monetary aggregates, decelerating the expansion in aggregate demand. The favourable impact of this deceleration in aggregate demand coupled with the healthy development on the supply side is expected to be observed during the forthcoming months in the form of moderating inflationary pressures in the economy.