Inflation to be high in Aug

Inflation to be high in Aug

Inflation is expected to maintain the current high levels of 5.4 per cent, experienced last month, this month as well, due to high fuel prices and the cascading effects thereof, complemented by high food prices, Central Bank Governor Dr. Indrajit Coomaraswamy said Friday (3).

Year end inflation is expected to reflect mid single digit levels, with a gradual tapering of inflationary pressure expected after this month, he said. However, core inflation, which depends on the Central Bank’s policy rates, after discounting energy and food prices, have remained unchanged, he said.

Dr. Coomaraswamy further said that the Central Bank had decided against taking a loose monetary policy stance to spur growth at the Monetary Board meeting on 2 August due to an output gap that has reduced potential economic growth from 5.75 per cent to 4 per cent or under this year because of the recovery of the global economy underlined by rising rates in advanced economies coupled with the ending of quantitative easing in the Euro zone.

Those external developments, he said, leads to an increase in the interest rate differential complemented by rising yields of the Federal Reserve System’s benchmark Treasury (T) Bonds, made worse by expected Fed hikes of its policy rates next month and in December, spurring foreign exits from the country’s T Bond market and not necessarily due to political instability here, he said.

On a net basis, foreign exits from the island’s T Bond market in the year to 1 August numbered US$ 229 million, thereby pressuring the Rupee, which he said in the year to date had declined by 4.3 per cent.

The Central Bank kept its policy rates unchanged, with its key lending rate at 8.5 per cent and deposit rate at 7.25 per cent after the aforementioned Monetary Board meeting.

(Ceylon Today)

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