Inflation eases beyond IMF targets yet global pressures loom

• 23 Aug 2023
• 0

Sri Lanka’s inflation has decelerated to a single digit level in July as envisaged by the Central Bank even ahead of the IMF target.

Inflation measured by the Colombo Consumer Price Index (CCPI) shows a consistent deceleration for the 10th consecutive month to 6.3% in Jul-23 from 12.0% in Jun-23, in line with the disinflation path envisaged by the CBSL.

The decline in inflation for the month primarily stemmed from both food and non-food categories, registering at 1.4%YoY and 10.5%YoY respectively, against to 4.1%YoY and 16.2%YoY in Jun-23.

First Capital Research in its latest Pre-policy analysis points out that with the pressure coming from the global front where global crude oil prices are peaking to a 9-month high of USD 84.4/barrel in Aug-23 on the back of tightening global supply, the indirect strain on the Sri Lankan economy is expected through possible fuel price revisions in the upcoming months.

The research firm further points out that while room for rate reduction remains, ongoing supply chain limitations coupled with global inflationary influences may impact Sri Lanka's inflation in the near term.

Moreover, amidst the appreciation of currency and faster than expected deceleration of inflation toning down to a single digit as expected by the CBSL, a wait and see approach ahead of another rate cut is sensible, in order to avoid the risk of aggravating the pent-up demand in the system, they further pointed out.

Moreover, with inflation declining in line with the CBSL envisaged targets (4%-6% by Dec-23) ahead of the IMF target of 14%-20% by Sep-23, they believe that CBSL may look to maintain rates and facilitate a smoother adjustment to inflation.

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