By: Staff Writer
January 30, Colombo (LNW): The Central Bank of Sri Lanka has explained the deviation of inflation from the target in the second and third quarters of 2024, attributing it primarily to temporary supply-side factors, particularly significant reductions in energy prices.
The bank has presented a detailed report to Parliament on these deviations, which are part of the Monetary Policy Framework Agreement (MPFA).
According to Central Bank Governor Nandalal Weerasinghe, inflation is set to be 5 percent under the MPFA, with a margin of ±2 percentage points. However, inflation fell much below this range, recording 1.4 percent in Q2 and 0.8 percent in Q3 of 2024.
The sharp drop in inflation during this period was primarily caused by a fall in energy prices. Significant reductions in electricity tariffs, domestic fuel, LP gas, and water prices in March and July 2024 contributed to this decline.
Additionally, an 8.2 percent appreciation in the Sri Lankan rupee against the US dollar further helped moderate inflation by reducing import costs.
Despite these drops in headline inflation, core inflation, which excludes food and energy, remained relatively stable at 3.8 percent, indicating that demand-side pressures stayed consistent. The Central Bank emphasized that monetary policy alone cannot effectively manage supply-side shocks such as energy price fluctuations.
Since June 2023, the Central Bank has maintained an accommodative monetary policy aimed at stimulating economic recovery, with interest rates reduced by 7.25 percentage points and an additional 50-basis-point cut in November 2024 to encourage private sector credit growth.
Although inflation is expected to stay low in the short term, the Central Bank predicts a return to the target range by the third quarter of 2025 as the effects of supply-side factors dissipate.
The ongoing deflation is linked to the previous reductions in energy prices, and it is anticipated that the negative inflation trend will continue for several months before gradually adjusting toward the target by mid-2025. The January 2025 reduction in the electricity tariff is expected to deepen deflation temporarily.
The Central Bank’s Monetary Policy Board will continue monitoring the situation and adjust its policy as necessary to maintain price stability and support economic growth. Despite the deflationary trends, economic growth remains strong, with GDP projected to increase by 5.5 percent in Q3 2024, following a 4.7 percent growth in Q2. The Central Bank’s current focus is on managing inflation and supporting the economy’s recovery.
