July 26, 2011 (LBO) – Sri Lanka should keep inflation below 7.0 percent to ensure economic stability Treasury Secretary P B Jayasundera said, as lower levels of inflation may be beyond the capacity of economic policies to deliver. Additional inflation is created by central bank credit, such as liquidity facilities given to banks or money printed to finance budget deficits.
Many Asian nations, including dollar pegged ones, however have lower levels of inflation than Sri Lanka.
In India the so-called ‘panic level’ is 5.0 percent. Reserve Bank of India is scrambling to rein in inflation following a bout of earlier loose fiscal and monetary policy.
India’s policy rate at which cash is injected to banks (rupees are printed through liquidity facilities) is now 7.50 percent, and excess money is withdrawn at 6.50 percent. Another rate hike is expected shortly.
The equivalent in Sri Lanka is 8.50 percent and 7.0 percent.
India however has a more freely floating exchange rate. Better managed countries in Asia and the Pacific have inflation rates of around 2.0 percent. Some such as Australia and New Zealand has inflation targeting laws.
Before the creation of a dollar pegged central bank in 1950, which allowed