May 31, 2012 (LBO) – Consumer prices in Sri Lanka’s capital Colombo rose 7.0 percent in May 2012 from a year earlier, up from 6.1 percent in April with the inflation index rising 1.4 percent in the month, the state statistics office said. In the past, a float of the currency to end a balance of payment crisis has been accompanied by a strengthening of the peg, amid reduced credit growth, helping keep inflation low.
But this time, analysts have said that continued sterilized sales of currency for oil by the Central Bank and intermittent unsterilized dollar purchases have kept the peg weak.
Analysts have urged the Central Bank to rapidly sell down its Treasury bill stock outright to mop up excess rupees, whenever it makes large dollar purchase to prevent fresh pressure on the peg.
Short term interest rates in Treasury bill markets have been easing, which analysts say has creating conditions for the Central Bank to sell down its Treasuries stock, lock up foreign reserve and strengthen the exchange rate.
When the exchange rate weakens, prices of both imports and exported commodities go up, and the price rises eventually spread to non-trade goods as well, unless the exchange rate is reversed.
Food prices rose 2.5 perce