April 07, (LBO) – Sri Lanka has space for easing policy with inflation coming down, Central Bank governor Nivard Cabraal said, as the monetary authority sounded strong warnings against runaway government spending. “What we like to say is when inflation comes down there is more space to relax monetary,” Cabraal told reporters Monday. “We cannot give amounts and time.”
Though there is clearly monetary space for easing policy, doubts are emerging about the fiscal space available for further easing.
Sri Lanka’s inflation came down sharply from almost 30 percent in early 2008 – pushed up partly due to inflation imported through a de facto dollar peg – to 14.4 percent at year-end.
Tight monetary policy till September 2008 has enabled Sri Lanka to benefit from global deflationary conditions by not creating off-setting domestic inflation. By end-March 2009, the Central Bank had brought inflation down to 5.3 percent.
“We maintained some of the toughest monetary policy in the world,” Cabraal said.
“Inflation has come down to 5.0 percent. Our monetary policy, of reserve money targeting has worked.”
Analysts say tight monetary policy followed from 2007 by Cabraal also st