Sri Lanka’s inflation at 28-month low

Sri Lanka’s annual inflation surprisingly slowed to a 28-month low, government data showed on Wednesday, despite an increase in fuel prices by an average of 40 per cent and costlier imports caused by a more than 6 per cent depreciation in the rupee. Annual inflation eased to 2.7 per cent this month from a year earlier, well below market expectations, and down from 3.8 per cent in January on a new consumer price index. A Reuters poll by 15 analysts had expected annual inflation to have risen to a five-month high of 5.3 per cent, with their forecasts in a range of 3.8-10 per cent. “I can’t even imagine how inflation could come down after the fuel price hike and its trickle-down effect,” an economist said on condition of anonymity. In February, the government raised fuel prices by between 9 per cent and 50 per cent, and electricity prices by as much 40 per cent. Those price hikes, plus others in widely-consumed commodities, have spawned sporadic protests. Sri Lanka’s rupee ended weaker on Wednesday on importer dollar demand, as traders shrugged off central bank intervention signals and rating agencies warned the sovereign rating may be at risk due to a potential balance-of-payments problem. The rupee closed at 121.80/122.00 to the dollar, against on Tuesday’s close of 121.40/60, on importer dollar demand in light trade, dealers said. It has fallen 6.6 per cent since Feb.9 after the central bank decided to drop price-specific intervention to maintain a targeted exchange rate, which cost it more than $2.7 billion in foreign exchange reserves since August. Standard & Poor’s Ratings Services on Wednesday revised Sri Lanka’s long-term foreign currency sovereign rating outlook to stable from positive due to external imbalances while Fitch warned of a rating downgrade for the same reason. sday, but the central bank sold $40 million in dollars through a state bank to bring the currency back up, in a break with its new forex policy. A Reuters monthly forex poll on Wednesday forecast the rupee to fall as far as 128.50 by the end of August. Government data on Wednesday showed that inflation in February surprisingly slowed to a 28-month low, despite an increase in fuel prices and costlier imports caused by the rupee’s fall.