Aug 30, 2012 (LBO) – Consumer prices in Sri Lanka’s capital Colombo rose 9.5 percent in August 2012 from a year earlier, easing slightly from 9.8 percent in July, with the index falling in absolute terms in the month, the state statistics office said. The Colombo Consumer Price Index fell 0.6 percent during the month with the food and non-alcoholic beverages components in the index falling 1.1 percent.
Sri Lanka’s inflation accelerated from low single digits after the island’s soft-pegged Central Bank, sterilized foreign exchange sales with printed money, worsened a credit bubble and made the rupee fall nearly 18 percent over the past year.
However bank credit is now easing. Past experience has shown that inflation eases as credit slows or contracts following a balance of payments crisis, especially if the exchange rate also strengthens.
Sri Lanka’s exchange rate however has not strengthened despite strong capital inflows, because the monetary authority had bought the dollars and created liquidity, preventing a strengthening of the exchange rate.
Analysts have urged the Central Bank to gently sterilize foreign exchange purchases (reversing the cycle that occurs in a balance of payments crisis), and push the exchange rate up to bri