Sri Lanka inflation stumps markets

Sri Lankan Police forming a human chain in parliament to protect the Speaker and enable a vote.

Mar 16, 2011 (LBO) – Sri Lanka’s rising inflation and negative real rates have stumped markets with bond liquidity vanishing, quotes widening and forward dollar premiums doubling amid uncertainty and lack of direction, dealers said. The weighted average prime lending rate has also started to move up slightly to 9.25 percent in the week ending March 11, from 8.92 percent in the first week of January.

Dealers say activity in bond markets started to slow from February and secondary market activity has dried up rapidly over the past two weeks.

Sri Lanka’s inflation rose to 7.8 percent in February from 6.9 percent in March. Though authorities have said the spike is partly due to floods which disrupted vegetable prices and is likely to ease in the next two months, inflation has been creeping up steadily.

Inflation crept over 5.0 percent in August, a level that even neighboring India considers too high.

Wide Quotes

“There is no direction in markets. If I want to sell a 500 million rupee bond there is no quote,” a dealer said.

A bond maturing in 2015 for example may be traded around 8.90 percent for a quantity of about 50 million rupees. But the next 50 million will be about 5 or 10 basis points abov