Sri Lanka not fighting rising prices

When Sri Lankan inflation soared to double digits last year, the country’s central bank waited for months before tightening policy, leading observers to wonder if it has abandoned its commitment to keep prices low. When Sri Lankan inflation soared to double digits last year, the country’s central bank waited for months before tightening policy, leading observers to wonder if it has abandoned its commitment to keep prices low. Spurring that suspicion is a change of government in early 2004 which saw the previous aggressively pro-business government replaced by a coalition with leftist leanings.

Now, economists and other observers think that the present government – with its priority on growth and wealth distribution to the country’s poor, a large section of the population – may have pressured the central bank to leave interest rates low.

Under this perception, economists think that despite the expectations for prices to rise further, the central bank will likely hold its policy benchmarks unchanged for at least another few months.

The central bank aggressively cut rates in 2001 and 2002 to revive an economy battered by years of ethnic strife. It increased rates by 50 basis points last Novemb