Sri Lanka needs monetary tightening to head off inflation spike: economists

Nov 25, 2009 (LBO) - Sri Lanka's inflation may top 10 percent next year unless corrective action is taken, and recent trends in the island's most widely watched index should not make policymakers complacent, economists have said. Prices in Sri Lanka's capital, measured by a revised Colombo Consumer Price Index, rose 1.4 percent in October from a year earlier, and 24.3 percent in October 2008.

Warning Signs

"But, every month, the index value rises by closer to 1.0 percent and, therefore, by this time next year, the index should rise by about 10 – 12 percent," W A Wijewardene, a top monetary economist, and former deputy governor of Sri Lanka's central bank wrote in his WatchTower column on LBO.

"So, as the past experience has shown, the slow growth in NCCPI (New Colombo Consumer Price Index) will not become sustainable unless the Central Bank tightens, rather than loosens, its monetary policy."

The index which dipped to 201.0 points in April is now at 209.4.

Sri Lanka's central bank has been steadily pulling out excess liquidity from money markets amid low private sector credit growth and foreign inflows, triggered partly by low US interest rates.

Sri Lanka's rupee has a peg to the US doll