Sri Lanka’s key inflation rate eases to 4% in August

Vegetable seller in Sri Lanka

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Sri Lanka’s key inflation rate eased to 4% in August from 6.3% a month ago, the statistics department said on Thursday, marking continued stabilisation for the crisis-ridden economy.

Soaring inflation has battered the economy for more than a year after a severe foreign exchange shortage touched off the Indian Ocean island’s worst financial crisis in seven decades.

The Colombo Consumer Price Index (CCPI) reflected food inflation reaching a negative 4.8% in August, after hitting a negative 1.4% in July. Non-food inflation was 8.7%, the Census and Statistics Department said in a statement.

Over the last six months, inflation has gradually slackened from a peak of 50.6% in February, after the government changed the base year of inflation in its calculation from 2013 to 2021.

In September last year, inflation soared to 69.8%, with food inflation at 94%.

“Even though there were gas, water and fuel increases in August, that is not reflected in inflation numbers because of the high base effect,” said Dimantha Mathew, head of research, First Capital.

“But inflation will stop benefiting from the high base effect from September, and then we expect inflation to stabilise at around 5%.”

Since Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund in March, its economic stress has been slowly subsiding with its currency appreciating about 10% this year and reserves improving.

But the economy is nevertheless expected to record a 2% contraction, according to government estimates, after shrinking 7.8% last year.

Sri Lanka’s central bank kept interest rates unchanged last week after cutting policy rates by 450 basis points in June and July this year, following a rise to a record 1050 basis points between April 2022 and March this year.

But the Central Bank of Sri Lanka is expected to continue easing interest rates, possibly by as much as another 200 basis points, during the second half of 2023 to improve growth while keeping a 4-6% inflation target band, analysts said.

The Colombo Consumer Price Index, a lead indicator for broader national prices, tracks inflation in Sri Lanka’s biggest city.

The figure for national consumer price inflation, released with a lag of 21 days every month, also eased to 4.6% year-on-year in July from 10.8% in June.