Sri Lanka’s key inflation rate dipped to 4.0pc from 69.8pc in 11 months

Sri Lanka's key inflation rate eased to 4.0 per cent in August, marking continued stabilisation for the crisis-ridden economy, the statistics department of the country said on Thursday.

Soaring inflation has battered the economy for more than a year after a severe foreign exchange shortage touched off the Indian Ocean island's worst financial crisis in seven decades.

In September last year, inflation soared to 69.8 per cent, with food inflation at 94 per cent.

Over the last six months, inflation has gradually slackened from a peak of 50.6 per cent in February, after the government changed the base year of inflation in its calculation from 2013 to 2021.

The inflation rate was 6.3 per cent in July.

The Colombo Consumer Price Index reflected food inflation reaching a negative 4.8 per cent in August, after hitting a negative 1.4 per cent in July. Non-food inflation was 8.7 per cent, the Census and Statistics Department said in a statement.

"Even though there were gas, water and fuel increases in August, that is not reflected in inflation numbers because of the high base effect," said Dimantha Mathew, head of research, First Capital.

"But inflation will stop benefiting from the high base effect from September, and then we expect inflation to stabilise at around 5 per cent."

Since Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund in March, its economic stress has been slowly subsiding with its currency appreciating about 10 per cent this year and reserves improving.

But the economy is nevertheless expected to record a 2 per cent contraction, according to government estimates, after shrinking 7.8 per cent last year.

Sri Lanka’s central bank kept interest rates unchanged last week after cutting policy rates by 450 basis points in June and July this year, following a rise to a record 1050 basis points between April 2022 and March this year.

But the Central Bank of Sri Lanka is expected to continue easing interest rates, possibly by as much as another 200 basis points, during the second half of 2023 to improve growth while keeping a 4-6 per cent inflation target band, analysts said.

The Colombo Consumer Price Index, a lead indicator for broader national prices, tracks inflation in Sri Lanka's biggest city.

The figure for national consumer price inflation, released with a lag of 21 days every month, also eased to 4.6 per cent year-on-year in July from 10.8 per cent in June.

A vendor cooking food for customers in his food cart at Galle Face Green in Colombo on October 31 last year –Reuters file photo