Treasury pressure to print money between 2004 and 2006 and keep interest rates low pushed Sri Lanka's inflation to above 20 percent and created an economic bubble.
In the month of October the revised Colombo Consumer Price Index (CCPI) rose 0.4 percent higher than the September rise of 0.
2 percent.
In October last year prices fell 0.3 percent, which also tends to exaggerate the base effect.
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Central Bank Governor Nivard Cabraal said the monetary authority was expecting 2009 to finish with inflation at 3.5 percent.
Sri Lanka's money markets have experienced excess liquidity from mid 2009 following a float of the rupee and a deal with the International Monetary Fund.
Interest rates have been brought down, with the repo rate at which the Central Bank drains money from the system being cut to 8.0 percent.
In a related development, Sri Lanka finance ministry told state banks this week to extend credit at rates between 8.0 to 12.0 percent, raising fears of returning fiscal dominanc