Guessing Game

Mar. 31 (Dow Jones)–When inflation in Sri Lanka surged last year, the central bank went on an aggressive monetary tightening that saw 125 basis points added over 2005. Inflation has begun to slide since then, and the central bank appears to be preparing to shift to a looser policy, but analysts said it’s unlikely that the Central Bank of Sri Lanka would be as hasty in taking its policy repurchase and reverse repo rates lower.

If inflation can be contained or reduced further from current levels and there’s progress in peace efforts, the central bank may cut rates by between 25-50 basis points in the second half of 2006, say analysts.

“The bank will need to watch crude oil prices which could reverse the direction of inflation. Subsidies offered in the budget could also put pressure on inflation this year,” said Channa Amaratunga, chief investment officer at Boston Asset Management.

Sri Lanka imports all of its crude oil requirements, and with a weaker rupee and record high global crude oil prices last year, annual average inflation soared to a high of nearly 13% from 8.8% in January 2005. The average inflation rate was 11.6% last year.

The governme