Sri Lanka Says Cheaper Commodities Easing Inflation

By Anusha Ondaatjie

Aug. 20 (Bloomberg) -- Sri Lanka's central bank said lower fuel and food prices will help ``moderate'' Asia's second- fastest inflation, after leaving interest rates unchanged for an 18th straight meeting.

``With the easing of commodity prices in international markets, external price pressures on domestic inflation are likely to further abate in the months ahead,'' the central bank said in a statement in Colombo today after maintaining its benchmark repurchase rate at 10.5 percent.

Crude oil has tumbled 22 percent from July's record $147.27 a barrel and rice and wheat are down 29 percent and 35 percent from their peaks. That may help slow inflation across Asia in the months ahead and reduce the pressure on the region's central banks to raise interest rates.

``We are seeing in recent months the commodity boom starting to fizzle,'' said Robert Subbaraman, chief Asia economist at Lehman Brothers Holdings Inc. in Hong Kong. ``We think prices will remain fairly tame, particularly oil. Also with our view that Asian growth is going to slow, inflation in the region is close to peaking.''

The Sri Lankan rupee was little changed at 107.9 to the dollar at 10:45 a.m. in Colombo, according to Hatton National Bank Ltd. The yield on the 16 percent bond due in April 2009 was holding at 18.3 percent.

Inflation Slows

Consumer prices in Sri Lanka's capital Colombo rose 26.6 percent last month from a year earlier, after increasing 28.2 percent in June. That was the first time inflation has slowed in seven months.

China's inflation cooled in July to the weakest pace in 10 months. Indonesia's central bank expects consumer prices to gain between 6.5 percent and 7.5 percent next year, easing from July's 22-month-high gain of 11.9 percent.

Policy makers across Asia have been combating price pressures by raising interest rates. Sri Lanka's central bank has been relying instead on reducing money in circulation to tackle inflation, and last month lowered its 2008 target for reserve-money growth to 11.75 percent from 12.5 percent.

``Given its recent performance we believe the central bank will be able to achieve the new aggressive targets,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. ``With international commodity prices also taking a breather, the outlook for Sri Lanka inflation is looking better.''

`Tighter' Policy

Inflation will continue to moderate amid a ``deceleration in aggregate demand coupled with healthy developments on the supply side,'' the central bank said in today's statement. Price pressures will ease as ``tight'' monetary policy damps consumer spending, central bank Governor Nivard Cabraal said Aug. 8.

Governor Cabraal and his colleagues have also been fighting inflation by controlling credit demand.

Credit growth in Sri Lanka's private sector, including consumers, slowed to 12.7 percent by the end of June from as much as 26 percent last year, according to the central bank.

``The tighter monetary policy stance has yielded its desired impact on monetary aggregates, decelerating the expansion in aggregate demand,'' the bank said today.

Growth in Sri Lanka's economy slowed to 6.2 percent in the first quarter from 7.6 percent in the previous three months. Escalating violence in the island's 25-year civil war, including bomb attacks in Colombo, reduced spending.

The central bank expects economic growth of 7 percent this year, up from 6.8 percent in 2007.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net.