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The Central Bank said yesterday that actual inflation for 2008 would be significantly higher than the bank’s previous estimates due to the surge in international oil prices.
“The continuation of the unprecedented surge in crude oil prices has naturally lead to the substantial upward revision in domestic fuel prices, inevitably leading to an increase in headline inflation in the coming months, although it would contribute to softening the rising inflationary pressures in the year 2009 and beyond,” the Central Bank said in its Monetrary Policy Review for May 2008.
“In these circumstances, there is a strong likelihood of the actual 2008 inflation being significantly higher than the previous estimates which were computed on the basis of the crude oil prices during the year 2008 being at an annual average of around US dollars 90.”
The point to point change in inflation in the New Colombo Consumers’ Price Index [CCPI (N)] reached 25 percent in April, from 23.8 percent in March, caused by increasing international commodity and oil prices and constaints in domestic supply.
“Over the past many months, the Central Bank has been implementing a tight monetary policy stance to contain the demand driven inflationary pressures in the economy.”
“These policy actions and other prudential measures have been instrumental in bringing down the high rate of expansion in the monetary aggregates. Reserve money, the operating target of the monetary targeting framework recorded a lower growth of 10.2 per cent by end 2007 compared with 21.2 per cent in the year 2006.”
“Notwithstanding such outcome, the monetary policy stance was further tightened with a downward revision of the Reserve Money targets for the remaining three quarters of 2008 with a view to addressing the second round impact of the current high headline inflation.”
“As a result of these and other interventions, growth in the broad money supply has decelerated to a lower level from the higher range observed in early 2007. Accordingly, the growth in broad money stood at 13.7 per cent by end March 2008, declining marginally form 13.9 per cent in the previous month. This deceleration has been in line with the slowdown in the expansion of domestic credit in the economy.”
“Growth in credit to the private sector, the largest component of domestic credit, continued on its deceleration path, moving from 15.8 per cent at end February to 15.7 per cent by end March.”
“Credit to public corporations also declined over the February-March period, thereby supporting this trend further. Maintaining monetary and credit aggregates in accordance with the pre-determined levels would ensure the containment of demand pressures in the economy, leading to the decline in headline inflation following the phasing out of the impact of prevailing high international commodity and oil prices,” the May 2008 Monetary Policy Review said.