Sri Lanka April Inflation Accelerates on Food Prices

By Anusha Ondaatjie

April 30 (Bloomberg) -- Sri Lanka's inflation accelerated at the fastest pace in at least four years in April on higher food and energy costs, threatening economic growth.

Consumer prices in the capital Colombo rose 25 percent from a year earlier, after increasing 23.8 percent in March, the statistics department said today. The median estimate of 10 analysts in a Bloomberg survey was for a gain of 25.1 percent.

Central Bank Governor Nivard Cabraal, who has said the nation needs to rein in inflation to achieve 7 percent growth this year, may need to do more to check prices. Inflation in 2008 may exceed the bank's target as commodity prices reach records, requiring ``tight monetary policy,'' he said April 12.

``I hope the central bank will give priority to controlling inflation,'' said Vajira Premawardhana, head of research at Lanka Orix Securities Pvt. in Colombo. ``The flip side is compromising on growth.''

The central bank, which this month kept its key interest rate at 10.5 percent for the 14th straight meeting, may need to consider increasing the proportion of deposits that commercial lenders must place with it or let the currency appreciate to cool runaway inflation, according to Fitch Ratings.

Central Bank of Sri Lanka has kept monetary policy tight with its daily open-market operations to adjust the amount of cash in the banking system and by controlling credit demand.

Growth, Inflation

Annual inflation, or the 12-month moving average increase in prices, jumped to 18.7 percent in April. The central bank is targeting annual inflation of about 10 percent for 2008.

The authority joins other Asian central banks in balancing the threat of slowing growth against quickening inflation. India's central bank yesterday unexpectedly ordered lenders to set aside more reserves for the second time in less than two weeks to tame soaring prices.

The South Asian island economy may expand 7 percent in 2008, at the lower end of the range estimated in November, the central bank said in its annual report on April 8.

Growth may slow to 5.8 percent this year from 6.8 percent in 2007 amid central bank measures to cool inflation, James McCormack, head of Asia-Pacific sovereign ratings at Fitch Ratings, said April 10.

Price gains this month were led by a 40.2 percent increase in the cost of food and beverages. Housing and utility prices gained 11.1 percent.

Sri Lanka, which gets two-thirds of its electricity from oil-fired plants, levied a 30 percent ``fuel-adjustment charge'' on some users from March 15. Crude oil futures touched a record $119.93 on April 28. Prices are up 76 percent from a year ago.

April's year-on-year inflation was the fastest since 2004, according to data compiled by the statistics department for a new index going back to that year.

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