Sri Lanka could see higher inflation if global oil prices stay high for a long period, Central Bank of Sri Lanka (CBSL) Governor Nandalal Weerasinghe said this week.
Inflation measured by the Colombo Consumer Price Index (CCPI) remained at a 40-month high of 8.1 percent in September. The increase was mainly driven by market-reflected fuel prices and their spillover effect on the wider economy.
Weerasinghe told an institutional investor forum organised jointly by the Colombo Stock Exchange and the Securities and Exchange Commission of Sri Lanka that the Central Bank had accounted for the impact of the Middle East conflict in June. At that time it expected oil prices to settle around $90 a barrel towards the end of the year.
“Right now, it appears now is still at an elevated level than what we expected,” he said. “But even with that elevated level still, we think even around $100 a barrel, we should be able to manage this inflation at current levels.”
He said that if higher oil prices continue for a longer period, the country would see supply-side price shocks, and the higher cost of oil would show up in domestic prices.
The Governor said the question for the Central Bank was whether it needed to respond with monetary policy. That depended on the source of the inflation, whether it was anchoring future expectations and whether it was creating demand pressures. He said monetary policy is mainly demand-driven and that this was the Bank’s focus.
Background
The state-owned Ceylon Petroleum Corporation (CPC) has raised fuel prices by around 50 percent since the Middle East conflict began, according to figures reported alongside the Governor’s remarks.
Sri Lanka imports the oil it uses for thermal electricity generation, freight transport and agricultural machinery. When crude oil prices rise, the cost passes through supply chains to manufacturers, farmers and distributors, and eventually to shop prices.
The government also has less room to cushion consumers than it did in the past. Under the International Monetary Fund (IMF) programme, the US$3 billion Extended Fund Facility (EFF), Sri Lanka is required to price energy at market-reflected levels instead of subsidising it.
The CCPI is the headline measure of consumer prices in the Colombo district and is compiled by the Department of Census and Statistics. The Central Bank uses inflation readings to guide its policy interest rates.
What it means
For households, higher fuel prices tend to feed into transport fares, electricity costs and food prices. Families that spend a large share of their income on food and travel are usually affected most when these costs rise together.
The Governor’s comments suggest that, in the Central Bank’s view, the current inflation rate can be managed if oil stays near $100 a barrel, but that a prolonged period of higher prices would add to costs across the economy. Borrowers and savers will be watching the Bank’s next policy announcement for any change in interest rates.
