Nov 29, 2013 (LBO) – Consumer prices in Sri Lanka’s capital Colombo rose 5.6 percent in the 12-months to December from a year earlier, slowing from 6.7 percent a month earlier, with the index climbing 0.2 percent during the month. Under Sri Lanka’s so-called flexible exchange rate, where the Central Bank buys all capital inflows preventing currency appreciation, then allows rupee liquidity to remain in the banking system, putting downward pressure on the currency.
As a result, despite having very much higher interest rates than the anchor US currency, and sterilized forex purchase the rupee tends to be pressured.
The so-called annual average inflation, a lagging indicator which is averaged across two years slowed to 7.3 percent from 7.6 percent.
The Colombo Consumer Price Index gained 0.4 points to 176.5 points during the month, but is still at the same level as in June 2013.
Despite cutting interest rates the Central Bank has been sterilizing forex purchases steadily over the past few months, indicating that it was not printing money.
Analysts say inflation would have been lower if the monetary authority had allowed the exchange rate to appreciate.