Rupee fall drives inflation to 41-month high

Saturday, 30 June 2012 02:42 - - {{hitsCtrl.values.hits}}

Reuters: Sri Lanka’s inflation rate accelerated to a 41-month high in June driven by the rupee’s sharp depreciation, while food prices were hit by supply constraints due to drought and government policies to discourage selected imports.

Annual inflation hit 9.3% in June from a year earlier, its highest since January 2009 and up from 7.0% in May, government data showed on Friday.

Analysts polled by Reuters had forecast annual inflation in June would pick up to 7.6%.

“The rupee depreciation is taking a toll on inflation,” Danushka Samarasinghe, head of research at TKS Securities told Reuters. “It may recede if the rupee stabilises in the future.”

The rupee has depreciated around 18% since November, pushing up costs for the $59 billion economy, which imports most essential food commodities as well as fuel.

Consumer goods accounted for 20% of last year’s total$20 billion import bill.

The government has raised prices of several imports including essential goods since February. Samarasinghe said June inflation reflects effects of the price adjustments.

The central bank said the rise was due to high prices of vegetables, caused by short supply in the face of drought and base effect.

“We are somewhat concerned,” Central Bank Governor Ajith Nivard Cabraal told Reuters referring to the high inflation figure.

“This is mainly because of the base effect, as last year’s vegetable prices were very low and the short supply resulting from drought. That cannot be dealt with by monetary policy. But, we will discuss with relevant parties how best we can deal with this.”

D.C.A Gunawardena, a director at the Department of the Census and Statistics, said government policies to discourage imports such as milk powder by raising taxes have also pushed up the prices of selected commodities.

The International Monetary Fund (IMF) said on June 15 that annual inflation may rise to 9.5% this year and stressed the need for Colombo to keep monetary policy focused on price pressures “for the time being”.

The central bank in June kept its key policy rates unchanged after raising them twice since February to two-year highs, saying the recent increases were enough to moderate the expansion of both credit and the trade deficit.

Annual average inflation, measured on a 12-month moving average, rose to 5.8%, from 5.6% in May, accelerating for the first time since October 2011.

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