ECONOMYNEXT – Sri Lanka’s inflation fell 2.1 percent in the 12-months to November 2024, while the index fell back to September 2022 levels, official data showed, amid deflationary policy and currency appreciation by the central bank.
After rate cuts enforced by inflationary open market operations triggers a currency crisis and draws the International Monetary Fund, pegged currencies are usually not encouraged to appreciate based on a Mercantilist doctrine called ‘competitive exchange rates’.
But, the central bank under Governor Nandalal Weerasinghe has allowed the exchange rate to appreciate, boosting disposable incomes and a faster economic recovery and reserve collection.
Under so-called ‘flexible inflation targeting’, interest rates are usually slashed by crisis prone central banks on the claim that 12-month inflation is low using 12-month ‘real interest rates’ or econometric arguments.
Governor Weerasinghe however pointed out that inflation was very high over the recent past and the economy was recovering fast.
The central bank’s monetary policy has also allowed electricity and fuel prices to come down.
Global commodity prices have also started to come down after the US Fed tightened monetary policy from around March 2022, abandoning earlier Mercantilist (cost-push) doctrine that supply chain bottlenecks was the reason behind high inflation.
When the slashed rate is enforced with inflationary open market operations as private credit recovers, currencies come under pressure again in the middle of 4-year IMF program.
The central bank has allowed the exchange rate to appreciate from around 360 to the US dollar in March 2023 after a surrender rule was lifted, to around 291 to the US dollar now.
Sri Lanka’s rupee collapsed in 2022 as a float failed due to the surrender rule.
Deflationary policy itself started to show up in the balance of payments in September 2022 as a reported balance of payments surplus.
The food price index is down 2.1 percent over the past 12 months and 6.0 percent since September 2022. (Colombo/Nov29/2024)