Sri Lanka central bank warns of rising inflationary pressures

July 13, 2009 (LBO) – Sri Lanka’s central bank, which brought inflation down to 0.9 percent in June, warned of higher inflation raising the possibility that it may lag behind better performing dollar pegged peers in the region. Inflation fell to 0.9 percent in June, the lowest since February 2004, when consumer inflation in Sri Lanka’s capital was measured at the same level.

“This decline was supported by the stringent monetary policy stance exercised by the Central Bank in the recent months and lower international commodity prices,” the Central Bank said in its July monetary policy statement.

“While inflation is expected to gradually pick up from this month, particularly following the recent revision to fuel prices and its impact on domestic prices, inflation, on an year-on-year basis, is expected to remain at single digit levels throughout this year.”

Weak Record

Sri Lanka’s central bank had only rarely been able to keep inflation at ‘single digits’ especially after 1971-73 when the US dollar went off the gold standard and became a fully floating currency.

The bank was created in 1950 as a dollar soft-pegged central bank with money printing powers, abolishing currency board or ‘hard peg’ with