July 06, 2016 (LBO) – Sri Lanka’s newly appointed Central Bank Governor Indrajit Coomaraswamy says the monetary authority is closely watching interest rates, and the transmission impact of previous tightening takes 12 to 18 months.
“We still haven’t seen the full effects of what has already been done,” he told reporters on Tuesday.
“The slight spike in inflation is partly due to one off things like VAT, so that has to be stripped out. Core inflation actually has been somewhat more stable.”
Sri Lanka’s inflation as measured by Colombo Consumers Price Index accelerated to 6.0 percent in June 2016, up from 4.8 percent, on an year-on-year basis. The moving average inflation rate for the month of June 2016 was, however, lower at 2.2 percent.
“While monitoring the situation closely, there doesn’t seem to be any urgent need to have to do anything,” he said, adding there were international developments that require close monitoring.
According to commitments made to the IMF under a 1.5 billion dollar program sealed in June, Sri Lanka aims to transition towards inflation targeting with a flexible exchange rate regime.
Sri Lanka needs to keep inflation to around 5.4 percent by the end of the year, with core inflation around 4.5 percent, according to these commitments. Deputy Governor Nandalal Weerasinghe said Sri Lanka was currently within this IMF band and had not breach an inflation ceiling.
Commenting on the rupee-dollar pair, he said: “The policy is to manage the rate flexibly and not to have too much volatility in the system.”
Coomaraswamy said the currency is constantly under review not just for domestic impacts, but also international ones such as brexit, and the Central Bank must also take into timing, and sequencing when considering the exchange rate.
Weerasinghe said recently inflows and outflows from the currency market suggests that the currency is at an equilibrium level.