Inflation to decrease further - CB

The strategy of the Central Bank (CB) in implementing its monetary policy continues to be that of achieving targets for the quarterly average of daily reserve money, by absorbing liquidity through open market operations and allowing market interest rates to adjust accordingly to reflect the cost of funds.

Having met the quarterly targets for average reserve money in the first and second quarters of 2008, the Central Bank has been able to maintain average reserve money well below the indicative targets for July and August 2008, and it is therefore expected that the reserve money target for the quarter ending September 2008 would be achieved.

Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (CCPI=2002), declined to 24.9 per cent in August from the peak of 28.2 per cent in June 2008.

This decrease could be attributed mainly to improved domestic supply conditions in relation to food and the resulting decline in prices of food items as well as the containment of demand pressures through monetary policy.

The moderation in demand pressures is evidenced by the steady deceleration in broad money supply growth which is to be continued with the achievement of the recently revised tighter reserve money targets, further decelerating demand pressures in the future.

Year-on-year growth in the broad money supply declined further in July 2008 to 13.2 per cent from 16.6 per cent at end 2007.

Meanwhile, pressures on the price level emanating from international commodity prices have further moderated. These favourable developments on both demand and supply sides are likely to shape inflation expectations also so as to contain inflation further.