October 31, 2007 / 1:14 PM / in 11 years

Sri Lanka cbank sees inflation moderating

NEW DELHI (Reuters) - Sri Lanka’s inflation rate is expected to moderate and come down to single digit levels by the end of 2008, but monetary policy will remain tight for sometime, the country’s central bank governor said on Wednesday.

Inflation as measured on a 12-month moving average was 17.5 percent in September — its highest level in 13 years — rising from 17.3 percent in August and way above 11.2 percent in September last year.

“Towards middle of next year and latter part of next year, we will see inflation moderating and we are fairly confident we will have single digits by end of next year,” Central Bank Governor Ajith Nivard Cabraal told Reuters in an interview.

Asked whether tight monetary policy would continue for sometime, he said: “Yes.”

Cabraal said 6.7 percent gross economic growth would be achieved this year, and expansion of 7.5 percent next year would be possible if inflation was “addressed”.

“Next year, the growth target proposed by the government is 7.5 percent and we are moving towards growth target of that nature,” he said.

“I think that can be comfortably achieved but at the same time it is contingent upon inflation also being addressed.”

The central bank held interest rates steady last week for the eighth month in a row.

Last year, the economy expanded by 7.4 percent, the highest growth rate since 1978.

The economy grew in the first quarter of 2007 by 6.1 percent from a year earlier, the slowest pace in two years. Growth picked up to 6.4 percent in the second quarter, but high interest rates and renewed civil war between the state and Tamil Tiger rebels are weighing on the economy.

“Interest rates we have kept high because we have to address inflation and even at high interest rates we find that the private sector has been growing fairly vigourously,” Cabraal said.

He said high global oil prices were a burden on the economy but policymakers were trying several measures, including reducing its dependence on oil to produce power, to cushion the impact of such prices.

Oil bounced off early lows to hover around $90 a barrel on Wednesday after some profit-taking from this week’s record high, as the market awaited a key rate decision in the U.S. and data on crude inventories there.

“Four years back, for an annual requirement of 30 million barrels of oil, we paid $725 million. Last year for the same 30 million barrels we paid $2.1 billion,” Cabraal said.

“This year we will pay $2.4 billion for the same quantity of oil. It shows how much of a burden and how much of a drag it is on our economy.”

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